# A family that run a cropping farm wish to expand their business. A neighbour offers them an

## Question:

A family that run a cropping farm wish to expand their business. A neighbour offers them an area of 200 hectares. The amount of rent per annum for 5 years is K 6,500 per hectare. The family decide to do a discounted cash flow analysis (benefit: cost analysis) to determine whether or not to accept the offer. The discount rate that they require for the rental over 5 years is 20 per cent per annum. At the beginning of the first year they will need to invest an extra K 850,000 for cropping machinery. They expect that at the end of 5 years the salvage value of the machinery will be K 350,000. The rotation that they will use together with yield per hectare for 200 hectares per year with estimated income per kilogram and variable costs per year is shown in the following table.

Item | Year | |||||

1 | 2 | 3 | 4 | 5 | ||

Crop | Soyabeans | Maize | Sunflower | Maize | Casava | |

Area | Hectares | 200 | 200 | 200 | 200 | 200 |

Yield | T/ha | 3.0 | 5.0 | 2.5 | 5.0 | 10.5 |

Price/tonne | K | 4,200 | 2,500 | 4,700 | 2.500 | 1,200 |

Variable cost / ha. | K | 4,980 | 4,250 | 4,280 | 4,250 | 5,280 |

The layout for the calculations is shown in the power point presentation.

Note that increases in productivity for total extra income are equivalent to 13% per annum.

The inflation rate for total extra cost per annum is 13%, too.

Calculate the Net Present Value (NPV) for the required discount rate of 20% per annum for the investment period of 5 years.

Calculate the Internal Rate of Return as well.

Will the family decide to take up the rental for 5 years?

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