Problem 6-6 During the past year, Stacy McGill planted a new vineyard on 150 acr

Question

Problem 6-6

During the past year, Stacy McGill planted a new vineyard on 150 acres of land that she leases for $30,740 a year. She has asked you, as her accountant, to assist her in determining the value of her vineyard operation.

The vineyard will bear no grapes for the first 5 years (1–5). In the next 5 years (6–10), Stacy estimates that the vines will bear grapes that can be sold for $63,210 each year. For the next 20 years (11–30), she expects the harvest will provide annual revenues of $110,470. But during the last 10 years (31–40) of the vineyard’s life, she estimates that revenues will decline to $84,160 per year.

During the first 5 years, the annual cost of pruning, fertilizing, and caring for the vineyard is estimated at $8,820; during the years of production, 6–40, these costs will rise to $12,830 per year. The relevant market rate of interest for the entire period is 11%. Assume that all receipts and payments are made at the end of each year. (Use the table below.)

Dick Button has offered to buy Stacy’s vineyard business by assuming the 40-year lease. On the basis of the current value of the business, what is the minimum price Stacy should accept?

(Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Minimum price at which Stacy should accept the business $.......

Explanation / Answer

Calculate net cash flows each year as shown in the below table

Now calculate NPV using the excel formula as below

=NPV(22%,E2:E41) = $228,138.49

So minimum price Stacy should accept is $228,138. Anything below this, Stacy would have a loss and anything above this, Stacy would have a gain from the transaction.

Lease Payment Revenue Costs Net cash flows Year 1 30740 -8820 21920 Year 2 30740 -8820 21920 Year 3 30740 -8820 21920 Year 4 30740 -8820 21920 Year 5 30740 -8820 21920 Year 6 30740 63210 -12830 81120 Year 7 30740 63210 -12830 81120 Year 8 30740 63210 -12830 81120 Year 9 30740 63210 -12830 81120 Year 10 30740 63210 -12830 81120 Year 11 30740 110470 -12830 128380 Year 12 30740 110470 -12830 128380 Year 13 30740 110470 -12830 128380 Year 14 30740 110470 -12830 128380 Year 15 30740 110470 -12830 128380 Year 16 30740 110470 -12830 128380 Year 17 30740 110470 -12830 128380 Year 18 30740 110470 -12830 128380 Year 19 30740 110470 -12830 128380 Year 20 30740 110470 -12830 128380 Year 21 30740 110470 -12830 128380 Year 22 30740 110470 -12830 128380 Year 23 30740 110470 -12830 128380 Year 24 30740 110470 -12830 128380 Year 25 30740 110470 -12830 128380 Year 26 30740 110470 -12830 128380 Year 27 30740 110470 -12830 128380 Year 28 30740 110470 -12830 128380 Year 29 30740 110470 -12830 128380 Year 30 30740 110470 -12830 128380 Year 31 30740 84160 -12830 102070 Year 32 30740 84160 -12830 102070 Year 33 30740 84160 -12830 102070 Year 34 30740 84160 -12830 102070 Year 35 30740 84160 -12830 102070 Year 36 30740 84160 -12830 102070 Year 37 30740 84160 -12830 102070 Year 38 30740 84160 -12830 102070 Year 39 30740 84160 -12830 102070 Year 40 30740 84160 -12830 102070

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