Mr. Agirich of Aggie Farms isconsidering the purchase of 100 acres of prime ranch land that isadjacent the ranch he now owns. Mr. Agirich can operate theadditional 100 acres with present labor, machinery and breedinglivestock. The land is selling for $400 per acre.   Mr.Agirich believes that the operating receipts per acre of land peryear will $450 and operating expenses will be $420 in presentdollars. Mr. Agirich expects that the inflation rate will be 3% andoperating receipts and expenses per acre will increase at the rateof inflation. The farmer will sell the land in three years and heanticipates that land prices will increase at the rate of inflation(from a base price of $400). A bank will loan him $350 per acre ofland and the loan will be fully amortized over 15 years at 10%(annual payments). The outstanding balance of the loan will be paidat the end of the third year (balloon payment). Assume that themarginal tax rate is 30% and that Mr. Agirich requires at least a6% pre-tax, risk-free return on capital and a 4% risk premium onprojects of comparable risk. (Do the analysis on a per acrebasis.)

                                                                                                  

           A.        Lay out the cash flowsfor the investment.

           B.        Calculate the netpresent value. [NPV=$6.12]

           C.        Layout the financingcash flows associated with this investment.

           D.        Is there a potentialliquidity problem?

E.         What maximumprice should Mr. Agirich be willing to pay for an acre of land?

                       F.         Calculate thenet present value if the real net returns of $30.00 per acre andthe real purchase price of land of $400 per acre are assumed toincrease by 4% each year. Remember that you still need to adjustfor inflation. Everything else is the same as before.[NPV=42.04]