Question

The benefits of your invention to the average farm, lasts for three years, and increases the profits of the farm by $7,000 at the end of the first year, $5,000 at the end of the second year, and $3,000 at the end of the third year. Farmers can borrow from their banks for agricultural inputs at a rate of 4.5%.

What price will your new agricultural technique tend toward in a competitive market

If the process costs $5,000 at the beginning of the first year to implement, what is the NPV per application of the technique?

If you sold your product at the price and for the NPV you just calculated to 2,000 farmers per year, how much is that in annually?

If your patent lasts for 17 years, and if your cost of borrowing is 6%, how much is your patent worth?

In 1981, the Federal Reserve Chairman Paul Volcker raised the federal funds rate to 20% in an effort to combat inflation. The federal funds rate is a benchmark that other interest rates are compared to.

If suddenly the farmers could only borrow at 22.5%, what price will the symbiotic fungus application technique tend toward after the change in interest rates?

Using the new price you just calculated, if the application technique still costs $5,000 to implment, what is your new NPV per application?

If you still sell to 2,000 farmers per year, and you can now only borrow money at 24%, how much is your patent now worth?

Who benefits and who loses in this scenario when interest rates rise?

Calculate the percent change in the price of the application technique from the rise in interest rates.

Calculate the percent change in the value of your patent from the rise in interest rates.

If interest rate changes affect different members of society in such unequal ways, do you find interest rate control policies of the Federal Reserve to be just? Defend your answer.

Answer 1

1.

	Minimum Return of investment	4.50%
Year	Return	Net present value factor	Present value
1	7000	1.05	6,698.56
2	5000	1.09	4,578.65
3	3000	1.14	2,628.89
		Total	13,906.10

2.

	Minimum Return of investment	4.50%
Year	Return	Net present value factor	Present value
0	-5000	-	-5000
1	7000	1.05	6,698.56
2	5000	1.09	4,578.65
3	3000	1.14	2,628.89
		NPV	8,906.10

3.

If the price is calculated by the first method then annual earnings is			2,78,12,208.32	(2000 x 13,906.10)
If the price is calculated by the second method then annual earnings is			1,78,12,208.32	(2000 x 8,906.10)

4.

Cost of borrowing	6%
Number of years	17
1st method	(₹29,13,95,729.16)
2nd method	(₹18,66,23,132.26)

Assumptions:

Cost of brrowing of 6% is annual rate of borrowing

Free Cash flows is equal to amount of earnings (from farmer by selling to 2000 farmers annually)

Kindly note question has multiple sub-parts, I am answering first 4 questions. we are not allowed to answer more than that