In: Finance
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 150 crates. Each crate is estimated to sell
for $500 for the next 5 years. This price is expected to rise to
$600 per crate for all sales from years 6 through 10.
In order to get started, Fred and Frieda must pay $200,000 for the
land plus $25,000 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 $40,000 per year
for the first 5 years and $45,000 thereafter. The land is expected
to appreciate in value at a rate of 4 percent per year. The
couple's marginal tax rate is 30 percent for both ordinary income
and capital gains and losses.
If the couple requires at least a 10 percent return on their investment, calculate the net present value of the blueberry business. Round your answer to the nearest dollar.
Assume that the land can be sold for only $40,000 at the end of 10 years (a capital loss of $160,000). 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.