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

3. (7 pts.) Your firm is considering buying a tree farm with a 12% required return. If trees are planted today, the initial cost will be $490 and the farm will generate cash inflows of $395/year for 3 years. If the farm owner waits 1 year to plant trees, the initial cost will rise to $520 and the cash flows will increase to $420/yr. for the following 3 years. If the owner plants trees in two years, the initial outlay will be $560 and cash flows will be $465/yr. at t = 3, 4, & 5. The property will be worthless after 3 years of trees have been grown and harvested. The farm essentially 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 and briefly explain how you arrive at the price. (b) Next, suppose that only options ii & iii are available for the farm. Calculate a fair price for the farm and again briefly explain how you arrive at the price.

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jeff jeffy answered 8 months ago
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