Question

You can purchase a tract of land for $75,000 that you believe you can develop and sell as a residential development. Your development costs are $60,000 to be incurred immediately. You expect to sell all the lots in years 3-5 at a net income of $70,000, $85,000, and $68,000 respectively. Your required rate of return is 12 percent. Do you purchase the tract of land?

Answer 1

NPV :
NPV is the difference between Present value of Cash Inflows and Present value of cash outflows.

NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

Year	CF	PVF @12 %	Disc CF
0	$ (135,000.00)	1.0000	$ (135,000.00)
1	$                    -	0.8929	$                    -
2	$                    -	0.7972	$                    -
3	$      70,000.00	0.7118	$      49,824.62
4	$      85,000.00	0.6355	$      54,019.04
5	$      68,000.00	0.5674	$      38,585.03
NPV			$        7,428.68

As it has +ve NPV, we can proceed to purchase the Land.