Upland Orchard has acquired 70 acres of land and is deciding on what to plant. Upland currently
Question:
Upland Orchard has acquired 70 acres of land and is deciding on what to plant. Upland currently operates a 100-acre apple orchard and may use this additional 70-acre plot for apple, but they are also considering branching out (pun intended) and investing in peach rootstock.
Upland’s Orchard has an ROA of 8.50% (discount rate).
(1) Peach Rootstock
Initial investment: $96,000
Will generate a cash inflow of $9,500 per year for 20 years. This investment has a salvage value of $35,000.
(2) Apple rootstock
Initial investment: $109,000
Cash inflows are $14,500 in year 1 and go down by $500 per year. Apple has a salvage value of $3000.
Calculate the NPV and IRR for each investment.
Which investment should they make? Why?
Introduction to Corporate Finance What Companies Do
ISBN: 978-1111222284
3rd edition
Authors: John Graham, Scott Smart