Question

During the past year, Julia McGill planted a new vineyard on 150 acres of land that she leases for $30,380 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), Julia estimates that the vines will bear grapes that can be sold for $62,770 each year. For the next 20 years (11–30), she expects the harvest will provide annual revenues of $112,030. But during the last 10 years (31–40) of the vineyard’s life, she estimates that revenues will decline to $75,980 per year.

During the first 5 years, the annual cost of pruning, fertilizing, and caring for the vineyard is estimated at $8,830; during the years of production, 6–40, these costs will rise to $11,280 per year. The relevant market rate of interest for the entire period is 6%. Assume that all receipts and payments are made at the end of each year.

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

$

Answer 1

Year	Lease Rent (A)	Cost of Pruning fertilizing and caring (B)	Grapes Revenue (C)	Net Cash Flows (C-(A+B))	PVF 6%	Present Value of Cash Flows
1	30380	8830	0	-39210	0.94339	(36,990.32)
2	30380	8830	0	-39210	0.88999	(34,896.51)
3	30380	8830	0	-39210	0.83961	(32,921.11)
4	30380	8830	0	-39210	0.79209	(31,057.85)
5	30380	8830	0	-39210	0.74725	(29,299.67)
6	30380	11280	62770	21110	0.70496	14,881.71
7	30380	11280	62770	21110	0.66505	14,039.21
8	30380	11280	62770	21110	0.62741	13,244.63
9	30380	11280	62770	21110	0.59189	12,494.80
10	30380	11280	62770	21110	0.55839	11,787.61
11	30380	11280	112030	70370	0.52678	37,069.51
12	30380	11280	112030	70370	0.49696	34,971.08
13	30380	11280	112030	70370	0.46883	32,991.57
14	30380	11280	112030	70370	0.44230	31,124.65
15	30380	11280	112030	70370	0.41726	29,362.59
16	30380	11280	112030	70370	0.39364	27,700.45
17	30380	11280	112030	70370	0.37136	26,132.60
18	30380	11280	112030	70370	0.35034	24,653.43
19	30380	11280	112030	70370	0.33051	23,257.99
20	30380	11280	112030	70370	0.31180	21,941.37
21	30380	11280	112030	70370	0.29415	20,699.34
22	30380	11280	112030	70370	0.27750	19,527.68
23	30380	11280	112030	70370	0.26179	18,422.16
24	30380	11280	112030	70370	0.24697	17,379.28
25	30380	11280	112030	70370	0.23299	16,395.51
26	30380	11280	112030	70370	0.21981	15,468.03
27	30380	11280	112030	70370	0.20736	14,591.92
28	30380	11280	112030	70370	0.19563	13,766.48
29	30380	11280	112030	70370	0.18455	12,986.78
30	30380	11280	112030	70370	0.17411	12,252.12
31	30380	11280	75980	34320	0.16425	5,637.06
32	30380	11280	75980	34320	0.15495	5,317.88
33	30380	11280	75980	34320	0.14618	5,016.90
34	30380	11280	75980	34320	0.13791	4,733.07
35	30380	11280	75980	34320	0.13010	4,465.03
36	30380	11280	75980	34320	0.12274	4,212.44
37	30380	11280	75980	34320	0.11579	3,973.91
38	30380	11280	75980	34320	0.10923	3,748.77
39	30380	11280	75980	34320	0.10305	3,536.68
40	30380	11280	75980	34320	0.09722	3,336.66
Net Present Value						395,955

The Net Present Value is positive hence offer should be accepted.