The asking price of an acre of farm land is currently $1,050 per acre. The current net
Question:
The asking price of an acre of farm land is currently $1,050 per acre. The current net cash flow is $65 per acre, the investor's nominal cost of capital is 8.5% and the planning horizon is 20 years. The inflation rate of current returns is 3% and land values are 2%.
A. Evaluate the profitability (NPV) of the investment assuming no taxes and no debt financing.
B. Evaluate the profitability (NPV) of the investment assuming a tax rate of 25%.
C. Evaluate the profitability (NPV) of the investment assuming a tax rate of 25% and debt financing. Assume a 30% down payment, 8% interest rate, equal payment method and a 25 year amortization period.
D. Using the data from problem B. Find the maximum bid price the investor can afford to pay in order to earn an 8.5% rate of return. Also, find the maximum price for the conditions of problem C.
Basic Business Statistics Concepts and Applications
ISBN: 978-0134684840
14th edition
Authors: Mark L. Berenson, David M. Levine, Kathryn A. Szabat, David F. Stephan