Suppose you are a corn farmer in your home state. You have to decide between two projects. One project is to purchase new equipment for your farm that will help boost your profits for the next ten years. You also find out that you can purchase a large banana farm in Brazil for the same price as the equipment, and at current market prices for bananas you will make a lot more profit than you would from purchasing new corn farming equipment.
After asking around, you find out that the standard discount rate for evaluating the NPV of farming project is 6%. Most farmers in your home state seem to use this rate successfully. However, you don’t know any other banana farmers and you don’t know too much about farming in Brazil so you have to make a guess on an appropriate discount rate for the Brazilian banana farm.Would you say the Brazilian banana farm will need a lower or higher discount rate? A lot larger or smaller, or only a little?