where is the financing cost in this example question?
THis is question ID 383490 from Kaplan’s Qbank
An investor is analyzing the purchase of a piece of farmland. The farmland is 100 acres. If the investor purchases the property, he will finance 75% and put 25% equity into the deal. The bank loan rate on the property is 4%. The investor estimates that the land can be leased to a local farmer for $1,500 per acre per year. Additionally, he estimates that total property taxes are $45,000 per year and the annual insurance premium is $15,000. If the capitalization rate for similar farmland investments is 7.5%, the value of the farmland is closest to:
To determine the value of the property, the annual operating profit must be calculated and then divided by the capitalization rate. The operating profit is calculated as follows:
(= $1,500 per acre × 100 acres)
Less Property Taxes
The value of the farmland is then $1,200,000 (=$90,000 / 7.5%).
The question did not give us the purchasing price of the farmland, so we can completely ignore the financing cost?