Question

During the past year, Stacy McGill planted a new vineyard on 150 acres of land that she leases for $30,000 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), Stacy estimates that the vines will bear grapes that can be sold for $60,000 each year. For the next 20 years (11–30) she expects the harvest will provide annual revenues of $110,000. But during the last 10 years (31–40) of the vineyard’s life, she estimates that revenues will decline to $80,000 per year. During the first 5 years the annual cost of pruning, fertilizing, and caring for the vineyard is estimated at $9,000; during the years of production, 6–40, these costs will rise to $12,000 per year. The relevant market rate of interest for the entire period is 12%. Assume that all receipts and payments are made at the end of each year.

Answer 1

Based on the various costs that Stacy McGill will incur, and the present value of her revenue, the minimum price that Stacy should accept from Ric Button is $376,595.

What amount should Stacy accept?

This should be the net present value of her vineyard over 40 years.

Present value of revenue from 1 - 5 years is $0 because no grapes will be grown in the vineyard.

Present value of revenue from 6 - 10 years;
= 60,000 x 3.14772

= $188,863.20

Present value of revenue from 11 - 30 years

= 110,000 x 6.40475

= $704,522.50

Present value of revenue from 31 to 40 years:

= 80,000 x 1,28146

= $102,516.80

Then find the present value of the expenses:

Present value of expenses from 1 - 5 years:

= 9,000 x 4.21236

= $37,911.28

Present value of expenses from 6 - 40 years:

= 12,000 x 10.83393

= $130,007.16

Present value of lease:

= 30,000 x 15.04629

= $451,388.70

The minimum amount Stacy should sell for is therefore:

= 188,863.20 + 704,522.50 + 102,516.80 - 37,911.28 -  130,007.16 - 451,388.70

= $376,595.

Question is:

Eric Button has offered to buy Stacy’s vineyard business by assuming the 40-year lease. On the basis of the current value of the business, what is the minimum price Stacy should accept?

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