3. (7 pts.) Your firm is considering buying a tree farm with a 12% required return....

80.2K

Verified Solution

Question

Finance

3. (7 pts.) Your firm is considering buying a tree farm with a12% required return. If trees are planted today, the initial costwill be $490 and the farm will generate cash inflows of $395/yearfor 3 years. If the farm owner waits 1 year to plant trees, theinitial cost will rise to $520 and the cash flows will increase to$420/yr. for the following 3 years. If the owner plants trees intwo years, the initial outlay will be $560 and cash flows will be$465/yr. at t = 3, 4, & 5. The property will be worthless after3 years of trees have been grown and harvested. The farmessentially thus has three mutually exclusive options: plant trees(i) now, (ii) one year from now, or (iii) two years from now. (a)Determine a fair price (a fair valuation) for this project andbriefly explain how you arrive at the price. (b) Next, suppose thatonly options ii & iii are available for the farm. Calculate afair price for the farm and again briefly explain how you arrive atthe price.

Answer & Explanation Solved by verified expert

4.3 Ratings (871 Votes)

See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

3. (7 pts.) Your firm is considering buying a tree farm with a12% required return. If trees are planted today, the initial costwill be $490 and the farm will generate cash inflows of $395/yearfor 3 years. If the farm owner waits 1 year to plant trees, theinitial cost will rise to $520 and the cash flows will increase to$420/yr. for the following 3 years. If the owner plants trees intwo years, the initial outlay will be $560 and cash flows will be$465/yr. at t = 3, 4, & 5. The property will be worthless after3 years of trees have been grown and harvested. The farmessentially thus has three mutually exclusive options: plant trees(i) now, (ii) one year from now, or (iii) two years from now. (a)Determine a fair price (a fair valuation) for this project andbriefly explain how you arrive at the price. (b) Next, suppose thatonly options ii & iii are available for the farm. Calculate afair price for the farm and again briefly explain how you arrive atthe price.