Question

During the past year, Julia McGill planted a new vineyard on 150 acres of land that she leases for $30,920 a year. She has asked you, as her accountant, to assist her in determining the value of her vineyard operation. The vineyard will bear no grapes for the first 5 years (1–5). In the next 5 years (6–10), Julia estimates that the vines will bear grapes that can be sold for $64,360 each year. For the next 20 years (11–30), she expects the harvest will provide annual revenues of $110,130. But during the last 10 years (31–40) of the vineyard’s life, she estimates that revenues will decline to $75,170 per year. During the first 5 years, the annual cost of pruning, fertilizing, and caring for the vineyard is estimated at $8,830; during the years of production, 6–40, these costs will rise to $12,050 per year. The relevant market rate of interest for the entire period is 4%. Assume that all receipts and payments are made at the end of each year. Button has offered to buy Julia’s vineyard business by assuming the 40-year lease. On the basis of the current value of the business, what is the minimum price Julia should accept? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Minimum price at which Julia should accept the business?

Answer 1

JULIA Mc GILL VINE YARD
During 1-5 Years		$
Revenue from the Vine Yard per year	I	-
Less:
Payments/Expenses Incurred towards Cost of Pruning, fertilising and caring per year	II	8,830
Lease Rent per Year	III	30,920
Net Income/(loss) per year	I-(II+III)	-39,750
JULIA Mc GILL VINE YARD
During 6-10 Years		$
Revenue from the Vine Yard per year	I	64,360
Less:
Payments/Expenses Incurred towards Cost of Pruning, fertilising and caring per year	II	12,050
Lease Rent per Year	III	30,920
Net Income/(loss) per year	I-(II+III)	21,390
JULIA Mc GILL VINE YARD
During 11-30 Years		$
Revenue from the Vine Yard per year	I	1,10,130
Less:
Payments/Expenses Incurred towards Cost of Pruning, fertilising and caring per year	II	12,050
Lease Rent per Year	III	30,920
Net Income/(loss) per year	I-(II+III)	67,160
JULIA Mc GILL VINE YARD
During 31-40 Years		$
Revenue from the Vine Yard per year	I	75,170
Less:
Payments/Expenses Incurred towards Cost of Pruning, fertilising and caring per year	II	12,050
Lease Rent per Year	III	30,920
Net Income/(loss) per year	I-(II+III)	32,200

Calculating the Present Value of the Net Profit/(Loss) @ 4% which is the current market interest rates
Year	Net Profit or (Loss) for the relevant Year	Present Value Annuity Factor @ 4% for relevant Year	Present Value of the Profit/(Loss)
i	ii	iii	iv=ii*iii
1	-39,750	0.96154	-38,221
2	-39,750	0.92456	-36,751
3	-39,750	0.88900	-35,338
4	-39,750	0.85481	-33,979
5	-39,750	0.82193	-32,672
6	21,390	0.79032	16,905
7	21,390	0.75992	16,255
8	21,390	0.73069	15,629
9	21,390	0.70259	15,028
10	21,390	0.67557	14,450
11	67,160	0.64959	43,626
12	67,160	0.62461	41,949
13	67,160	0.60059	40,336
14	67,160	0.57749	38,784
15	67,160	0.55528	37,293
16	67,160	0.53392	35,858
17	67,160	0.51338	34,479
18	67,160	0.49363	33,152
19	67,160	0.47464	31,877
20	67,160	0.45638	30,650
21	67,160	0.43883	29,472
22	67,160	0.42195	28,338
23	67,160	0.40572	27,248
24	67,160	0.39012	26,200
25	67,160	0.37512	25,193
26	67,160	0.36069	24,224
27	67,160	0.34682	23,292
28	67,160	0.33348	22,397
29	67,160	0.32065	21,535
30	67,160	0.30832	20,707
31	32,200	0.29646	9,546
32	32,200	0.28506	9,179
33	32,200	0.27410	8,826
34	32,200	0.26355	8,486
35	32,200	0.25341	8,160
36	32,200	0.24366	ekkarill92 Next > < Previous Related Solutions During the past year, Julia McGill planted a new vineyard on 150 acres of land that... During the past year, Julia McGill planted a new vineyard on 150 acres of land that she leases for $30,090 a year. She has asked you, as her accountant, to assist her in determining the value of her vineyard operation. The vineyard will bear no grapes for the first 5 years (1–5). In the next 5 years (6–10), Julia estimates that the vines will bear grapes that can be sold for $61,290 each year. For the next 20 years (11–30),... During the past year, Cindy McGill planted a new vineyard on 150 acres of land that... During the past year, Cindy McGill planted a new vineyard on 150 acres of land that she leases for $31,860 a year. She has asked you, as her accountant, to assist her in determining the value of her vineyard operation. The vineyard will bear no grapes for the first 5 years (1–5). 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