Suppose you are a regular subscriber to the Financial Times and are considering whether to renew your subscription for a single year or two years. If your cost of capital is 10%, purchasing a two-year subscription for $775 rather than a one-year subscription for $420 is an excellent opportunity, particularly if you expect the one-year subscription price to increase next year.
The owner of a farm just west of Oberlin has signed a contract to sell the farm one year from now for $1 million. However, the holder of the contract has come up with an offer to close the deal today for a price of $950,000. If the farmer's cost of capital is 10% a year, and the land would simply lie fallow at no cost to either party during the year, should the farmer sell now or wait a year?
Suppose the farmer in the previous question had the opportunity to work the land for the year if she doesn't sell now. Doing so allows her to increase her income at the end of the year by $150,000. Of course, this entails some out-of-pocket current expenses amounting to $85,000. Now what should the farmer do?