Assume that you are the manager of firm that produces cherry jams. The price of pound...

Assume that you are the manager of firm that produces cherry jams. The price of pound of cherry is $2 and you spend $50,000 on cherries a year. You have an opportunity of buying a cherry farm that can supply all the cherries you need to make jam. The price of the farm is $40,000. You consider that the cost of producing your own cherries is $0.85 per pound. Assume that the annual discount rate is 4 percent and that you plan to own the farm for 20 years. At the end of the 20^th year, you will sell the farm for $65,000. Also, assume that you the costs at the end of the year. Write down the formula of the net present value for this scenario and use it to compute the net present value of the farm investment. Do you approve buying the farm?

Expert Solution

Conclusion: As the NPV of Farm investment is negative, it is advisable not to buy the farm and buy the cherries.

Rahul Sunny answered 2 years ago

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