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A farmer estimates that a 50 acre peach orchard will require an initial investment of $25,000...

A farmer estimates that a 50 acre peach orchard will require an initial investment of $25,000 for soil preparation and tree purchase and planting costs. Assume the farmer already owns the land that the orchard will be planted on. After planting, cash outflows are expected in years 1-3 as the young trees are established and produce no harvestable crops. Assume outflows of $10,000, $5000, and $5000 in years 1 through 3, respectively. In years 4 and 5 production will occur at one half and three quarters of full production, respectively, so revenues will pay a portion of expenses, and cash outflows of $1000 in year 4 and inflows of $2000 in year 5 will be incurred. In years 6-20, the orchard will be at full production and the annual net cash inflows are projected to be $5000. After 20 years of useful life, the potential of reduced yields and the development of new varieties usually make it necessary to consider the replacement of an orchard. So assume that the orchard will be replaced after year 20 and that there is no salvage value at that time. Assume the farmer has a cost of capital of 9%. What is the approximate net present value of the orchard?

a.

$32,530
b.

$13,780
c.

-$9,620
d.

-$15,460

Solutions

Expert Solution

Answer:- Option (D):- The approximate net present value of the orchard is  -$15,460 ( The NPV is coming as $15457.72 which is approximately $15,460)

Explanation:-

Following are the Excel sheets of calculation of NPV of the project:-

Following are the Formula sheets of above excel worksheets for easy understanding of the calculations:-

[ Note:- As initial investment is already taken with a negative sign in cash flows that is why it is added in the NPV calculation]

jeff jeffy answered 1 year ago
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