Question

You are considering the purchase of 10 acres to plant an apple orchard. The land is priced at $17,500/acre and it will cost $65,000 to plant the trees and install the irrigation system. Based on your research, you won't be producing enough apples to sell until year 5. From then on you estimate your net returns will be $45,000 a year. If you plan on operating the orchard for 15 years, what is your NPV? Assume that the land appreciates at 2.75%/year and you sell it after 15 years. Also assume that you have required rate of return of 10.95%.

Match the ratio with the category that it measures.

Current Ratio

Debt to Asset Ratio

Operating Expense Ratio

Operating Profit Margin

Answer 1

Outflow
Land	175,000
Plantation of tress	65,000
	240,000

NPV
Year	Inflow	Disc Factor	DCF
1	-	0.90	-
2	-	0.81	-
3	-	0.73	-
4	-	0.66	-
5	-	0.59	-
6	45,000.0	0.54	24,124.0
7	45,000.0	0.48	21,743.1
8	45,000.0	0.44	19,597.2
9	45,000.0	0.39	17,663.1
10	45,000.0	0.35	15,919.9
11	45,000.0	0.32	14,348.7
12	45,000.0	0.29	12,932.6
13	45,000.0	0.26	11,656.2
14	45,000.0	0.23	10,505.8
15	45,000.0	0.21	9,469.0
15	262,884.0	0.21	55,316
			213,276

*Land (compounded annually at 2.75% per annum, for 15 years)

It will not be profitable to go ahead for the proposal