Diane Badame, a financial analyst at Kaufman & Broad, a real estate firm, has been asked to make a recommendation about whether Kaufman & Broad should invest in a piece of land that would cost $85,000 in cash today. The investment rate of return on similar alternative investments is 10% per year, compounded annually. Diane estimates that the land can be sold next year for $91,000. Assuming that her forecast is correct, what should she recommend, and why?
A. Do not buy the land, because its present value is $86,842.25, which is greater than the purchase price.
B. Buy the land, because its present value is $82,727.27, which is a bargain compared to $85,000.
C. Do not buy the land, because its present value is $82,727.27, which is less than the price.
D. Buy the land, because it will be worth $6,000 more in one year’s time, so Kaufman & Broad can sell it for a profit.