Ken Is Considering Two Options for Selling Land for Which

question 54

Essay

Ken is considering two options for selling land for which he has an adjusted basis of $100,000 and on which there is a mortgage of $80,000.Under the first option, Ken will sell the land for $225,000 with a stipulation in the sales contract that he liquidate the mortgage before the sale is complete.Under the second option, Ken will sell the land for $145,000, and the buyer will assume the mortgage.Calculate Ken's recognized gain under both options.

Calculate and analyze the NPV of projects under different scenarios using probability forecasts.

Understand the importance of risk adjustment in capital budgeting and the use of appropriate discount rates.

Relate the concept of risk aversion from portfolio theory to capital budgeting decisions.

Evaluate the value of rough estimates of probability distribution of project NPV or IRR over point estimates.

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Definitions:

Adjusting Entry

A journal entry made in accounting to record changes in revenue and expense accounts in order to match revenues and expenses to the period in which they occurred.

Cash Invested

Money that is put into a business or project with the expectation of generating income or profit.

Accrued Interest

Interest that has accrued but remains unpaid.

Prepaid Insurance

Payments made for insurance services before the coverage period, recorded as an asset initially and expensed over time.