5 Fred Farmer is considering an investment in frog farming Market research indicates that frog...
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5 Fred Farmer is considering an investment in frog farming Market research indicates that frog meat is in demand in chic city restaurants, and frog hides and skins make excellent, vogue leather products. Farmer's trading entity is a proprietary company Preliminary financial data indicates that the expected before tax cash flows trom this investment is $78,000 Fred Farmer plans to either purchase the frog farm plant or alternately lease it. Former believes that the project has a life of four years, Purchase Details: The purchase price of plant, ponds, water reticulation equipment and stock will be $280,000. This equipment will have a residual value after 4 years expected to be $25.000 The equipment is depreciated at 25% prime cost for tax purposes. Additionally, there is an annual service contract fot of 39,000 per annum payable at the start of the year. Lease Details: The lease contract requires annual payments in advance of 590.000, The lease period is four years There is no residual on the lease The company tax rate is 30% payable in the year of income. Fred Farmer's after-tax cost of capital is 12% Required: What is the difference in the NPV calculations favouring either the lease or purchase option
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