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KF can obtain an option on a site for $100,000 on 31 December 2012. The option would give KF the right to purchase the site for $2.6 million on 31 December 2017. It is estimated that similar sites will then have a market value of $3 million. find out the present value of purchasing the option now and compare it with the present value of purchasing the land outright later on. Which is the better alternative? Why?

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