Question

Table 1 shows two alternative options for a $20k up-front investment, along with the Net Present Values associated with each. The discount rate used in the table is 4%

Table 1: Alternative $20k Investments, with PVs
	Year	Cow/Calf	PV	Grain	PV
Discount Rate	0	-$20,000	-$20,000	-$20,000	-$20,000
4%	1	$2,000	$1,923	$5,800	$5,577
	2	$4,000	$3,698	$5,800	$5,362
	3	$6,000	$5,334	$5,800	$5,156
	4	$8,000	$6,838	$5,800	$4,958
	5	$10,000	$8,219	$5,800	$4,767
	Total:	$10,000	$6,013	$9,000	$5,821

1. What is the NPV of the cow/calf investment assuming a discount rate of 4% and an inflation rate of 2%?

2. What is the NPV of the grain investment with a 4% discount rate and 2% inflation rate?

3. Use the discount rate adjustment method to account for risk in the investments, assuming a 3% risk premium for cow/calf, and a 1% risk premium for grain.

What is the NPV of the cow/calf investment if a 3% risk premium is included (in addition to the discount and inflation rates)?

4. What is the NPV of the grain investment if a 1% risk premium is included (in addition to the discount and inflation rates)?

Answer 1