Question

A farmer has been given the opportunity to become a part owner in a local fertilizer business. If the farmer becomes an owner of the fertilizer business, he will receive $4,000 each year from the firm's profits. In addition, the farmer will receive a discount on fertilizer and he believes the discount will reduce his fertilizer costs by $2,000 per year. The farmer plans to retire in 25 years and thinks he can sell his equity in the fertilizer business for $50,000. (i) Calculate the market value of this investment if the market rate of return on comparable investments is

Answer 1

Answer:

$71,350

Explanation:

Here is the complete question:

A farmer has been given the opportunity to become a part owner in a local fertilizer business. If the farmer becomes an owner of the fertilizer business, he will receive $4,000 each year from the firm's profits. In addition, the farmer will receive a discount on fertilizer and he believes the discount will reduce his fertilizer costs by $2,000 per year. The farmer plans to retire in 25 years and thinks he can sell his equity in the fertilizer business for $50,000.

Calculate the market value of this investment if the market rate of return on comparable investments is 8%

The market value can be found by calculating the present value of the cash flows.

Present value can be calculated using a financial calculator:

Cash flow each year from year one to twenty four = $4000+$2000=$6000

Cash flow in year twenty five = $6000 + $50,000 = $56,000

I = 8%

Present value = $71,350

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you