A farmer estimates that a 50 acre peach orchard will require an initial investment of $25,000...

90.2K

Verified Solution

Question

Finance

A farmer estimates that a 50 acre peach orchard will require aninitial investment of $25,000 for soil preparation and treepurchase and planting costs. Assume the farmer already owns theland that the orchard will be planted on. After planting, cashoutflows are expected in years 1-3 as the young trees areestablished and produce no harvestable crops. Assume outflows of$10,000, $5000, and $5000 in years 1 through 3, respectively. Inyears 4 and 5 production will occur at one half and three quartersof full production, respectively, so revenues will pay a portion ofexpenses, and cash outflows of $1000 in year 4 and inflows of $2000in year 5 will be incurred. In years 6-20, the orchard will be atfull production and the annual net cash inflows are projected to be$5000. After 20 years of useful life, the potential of reducedyields and the development of new varieties usually make itnecessary to consider the replacement of an orchard. So assume thatthe orchard will be replaced after year 20 and that there is nosalvage value at that time. Assume the farmer has a cost of capitalof 9%. What is the approximate net present value of the orchard?HINT: DRAW A TIMELINE OF CASH INFLOWS AND OUTFLOWS
$32,530
-$9,620
$13,780
-$15,460

Answer & Explanation Solved by verified expert

4.0 Ratings (399 Votes)

Option D is the correct answerH K NPV PV 9 Present Value Year Cash Flow 250000009174 917400 2500000 1 11000000 2 500000 3500000 4 100000 5 200000 6 500000 08417 S 42085007722 386100 07084 70840 06499 129980 05962 S298100 7 500000 8 9 500000 10 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

A farmer estimates that a 50 acre peach orchard will require aninitial investment of $25,000 for soil preparation and treepurchase and planting costs. Assume the farmer already owns theland that the orchard will be planted on. After planting, cashoutflows are expected in years 1-3 as the young trees areestablished and produce no harvestable crops. Assume outflows of$10,000, $5000, and $5000 in years 1 through 3, respectively. Inyears 4 and 5 production will occur at one half and three quartersof full production, respectively, so revenues will pay a portion ofexpenses, and cash outflows of $1000 in year 4 and inflows of $2000in year 5 will be incurred. In years 6-20, the orchard will be atfull production and the annual net cash inflows are projected to be$5000. After 20 years of useful life, the potential of reducedyields and the development of new varieties usually make itnecessary to consider the replacement of an orchard. So assume thatthe orchard will be replaced after year 20 and that there is nosalvage value at that time. Assume the farmer has a cost of capitalof 9%. What is the approximate net present value of the orchard?HINT: DRAW A TIMELINE OF CASH INFLOWS AND OUTFLOWS$32,530-$9,620$13,780-$15,460