Question

Your company is looking to invest in some adjacent land to your current facility. You have two options, you can purchase the land outright now for $834,962. Or, you could put pay the balance off in 5 equal annual payments of $200,193. The payment schedule can be seen in the table below. What is the rate of return on buying outright?

Year	Single Payment	Annual Payments
0	-$821,362	-$200,193
1	0	-$200,193
2	0	-$200,193
3	0	-$200,193
4	0	-$200,193

	A.	Purchase the land now because you have a 10% rate of return.
	B.	Purchase the land in installments because it will have a higher yield
	C.	Don't purchase the land at all, there is no benefit to your organization.
	D.	Purchase the land in installments because, even though you're paying more in the long term, you have a higher yield of 14.5%.

Answer 1

Ans:

To solve this we will calculate IRR:

If we Buy Land now:

Initial Output : 821,362

This will save installment of $200,193 for 5 installemnts starting Now.

So Internal Rate of Return on installment saving :

Year	Description	Amount
0	Initial Cost ($821,362 - $200,193)	$       -6,21,169
1	Installment saving	$        2,00,193
2	Installment saving	$        2,00,193
3	Installment saving	$        2,00,193
4	Installment saving	$        2,00,193
IRR [=IRR(C2:C6)]	11%

Therefore correct answer is Option A. because you have rate of return of more than 10%.

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