Question

Fred and Frieda have always wanted to enter the blueberry business. They locate a 50-acre piece of hillside in Maine that is covered with blueberry bushes. They figure that the annual yield from the bushes will be 200 crates. Each crate is estimated to sell for $400 for the next 5 years. This price is expected to rise to $500 per crate for all sales from years 6 through 10.
In order to get started, Fred and Frieda must pay $125,000 for the land plus $20,000 for packing equipment. The packing equipment will be depreciated on a straight-line basis to a zero estimated salvage value at the end of 10 years. Fred and Frieda believe that at the end of 10 years, they will want to retire to Florida and sell their property.
Annual operating expenses, including salaries to Fred and Frieda and exclusive of depreciation, are estimated to be $55,000 per year for the first 5 years and $60,000 thereafter. The land is expected to appreciate in value at a rate of 5 percent per year. The couple's marginal tax rate is 30 percent for both ordinary income and capital gains and losses.

Use Table I, Table II, and Table IV to answer the questions.

1. If the couple requires at least a 12 percent return on their investment, calculate the net present value of the blueberry business. Round your answer to the nearest dollar.
   $   

   Should the couple enter the blueberry business?
   -Select-YesNoItem 2 , because NPV -Select-><=Item 3  0

2. Assume that the land can be sold for only $40,000 at the end of 10 years (a capital loss of $85,000). Calculate the new net present value of the blueberry business. (Assume that the couple may claim the full amount of their capital loss in the year it occurs—year 10.) Round your answer to the nearest dollar.
   $   

   Should the couple invest in the land and blueberry business?
   -Select-YesNoItem 5 , because NPV -Select-><=Item 6  0

Answer 1

a) Statement showing NPV

Particulars	0	1	2	3	4	5	6	7	8	9	10	NPV = sum of PV
Cost of land	-125000
Cost of packing equipment	-20000
Selling price per unit		400	400	400	400	400	500	500	500	500	500
Units sold		200	200	200	200	200	200	200	200	200	200
Total sales		80000	80000	80000	80000	80000	100000	100000	100000	100000	100000
Annual operating expense		-55000	-55000	-55000	-55000	-55000	-60000	-60000	-60000	-60000	-60000
Depreciation		-2000	-2000	-2000	-2000	-2000	-2000	-2000	-2000	-2000	-2000
PBT		23000	23000	23000	23000	23000	38000	38000	38000	38000	38000
Tax @ 30%		-6900	-6900	-6900	-6900	-6900	-11400	-11400	-11400	-11400	-11400
PAT		16100	16100	16100	16100	16100	26600	26600	26600	26600	26600
Add: Depreciation		2000	2000	2000	2000	2000	2000	2000	2000	2000	2000
Annual cash flow		18100	18100	18100	18100	18100	28600	28600	28600	28600	28600
Proceed from sale of land											180028.28
Total cash flow	-145000.00	18100.00	18100.00	18100.00	18100.00	18100.00	28600.00	28600.00	28600.00	28600.00	208628.28
PVIF @ 12%	1.0000	0.8929	0.7972	0.7118	0.6355	0.5674	0.5066	0.4523	0.4039	0.3606	0.3220
PV	-145000.00	16160.71	14429.21	12883.22	11502.88	10270.43	14489.65	12937.19	11551.06	10313.45	67172.72	36710.52

Thus NPV = $ 36711

Since NPV is positive, in this case couple should invest in the land and blueberry business

Statement showing cash flow from sale of land

Particulars	Amount
Value of land at end of year 10 =125000(1+r)^n =125000(1+5%)^10 =125000(1.05)^10 =125000 x 1.62889 = 203611.83	203611.83
Purchase price of land	125000.00
Profit	78611.83
Tax @ 30%	23583.55
Cash inflow from sale of land 203611.83 - 23583.55	180028.28

b) If land can be sold for only $40,000 at the end of 10 years then cash flow from sale of land

Particulars	Amount
Value of land at end of year 10	40000.00
Purchase price of land	125000.00
Profit	-85000.00
Tax savings @ 30%	25500.00
Cash inflow from sale of land 40000+25500	65500.00

Statement showing NPV

Particulars	0	1	2	3	4	5	6	7	8	9	10	NPV = sum of PV
Cost of land	-125000
Cost of packing equipment	-20000
Selling price per unit		400	400	400	400	400	500	500	500	500	500
Units sold		200	200	200	200	200	200	200	200	200	200
Total sales		80000	80000	80000	80000	80000	100000	100000	100000	100000	100000
Annual operating expense		-55000	-55000	-55000	-55000	-55000	-60000	-60000	-60000	-60000	-60000
Depreciation		-2000	-2000	-2000	-2000	-2000	-2000	-2000	-2000	-2000	-2000
PBT		23000	23000	23000	23000	23000	38000	38000	38000	38000	38000
Tax @ 30%		-6900	-6900	-6900	-6900	-6900	-11400	-11400	-11400	-11400	-11400
PAT		16100	16100	16100	16100	16100	26600	26600	26600	26600	26600
Add: Depreciation		2000	2000	2000	2000	2000	2000	2000	2000	2000	2000
Annual cash flow		18100	18100	18100	18100	18100	28600	28600	28600	28600	28600
Proceed from sale of land											65500.00
Total cash flow	-145000.00	18100.00	18100.00	18100.00	18100.00	18100.00	28600.00	28600.00	28600.00	28600.00	94100.00
PVIF @ 12%	1.0000	0.8929	0.7972	0.7118	0.6355	0.5674	0.5066	0.4523	0.4039	0.3606	0.3220
PV	-145000.00	16160.71	14429.21	12883.22	11502.88	10270.43	14489.65	12937.19	11551.06	10313.45	30297.68	-164.52

Thus NPV = -165 $

Since NPV is negative , in this case couple should not invest in the land and blueberry business