Sue have recently inherited a small land from her grandparents, which may be used for cattle rearing,
Question:
Sue have recently inherited a small land from her grandparents, which may be used for cattle rearing, goat breeding or forestry. She has estimated that the cash flows associated with these three projects will be as follows:
Cattle rearing: Initial cost: $20000 Annual income: $1150, payable annually in arrear for 20 years Sale price after 20 years: $20000
Goat breeding: Initial cost: $20000 Annual income $1000, payable annually in arrear for 20 years Sale price after 20 years: $25000
Forestry: Planting cost: $20000 Sales of mature trees after 20 years: $57000
a) Calculate the internal rates of return of each of these projects (to the nearest 0.01%) (Advise: interpolation to be conducted between two numbers separated by 0.5%)
b) Unfortunately, Sue do not have the capital for any of these ventures. However, she have been offered a bank loan by CIMB of $2000 at 5% per annum interest payable annually in arrear. This loan is repayable in 20 years' time, with no early repayment option. Should she require further loans, they will be granted by the loan on the same interest basis and will be repayable at the same date as the original loan. If she has any money to invest after paying bank interest, she may invest it to secure 4% interest per annum effective.
Discuss which of the three projects will give Sue the largest profit in 20 years' time.
South-Western Federal Taxation 2020 Comprehensive
ISBN: 9780357109144
43rd Edition
Authors: David M. Maloney, William A. Raabe, James C. Young, Annette Nellen, William H. Hoffman