A farmer has been given the opportunity to become a part owner in a local fertilizer business. If the farmer becomes an owner of the fertilizer business, he will receive $5,000 each year from the firm's profits. In addition, the farmer will receive a discount on fertilizer and he believes the discount will reduce his fertilizer costs by $2,000 per year. The farmer plans to retire in 20 years and thinks he can sell his equity in the fertilizer business for $80,000.
(i) Calculate the market value of this investment if the market rate of return on comparable investments is 15%
a. $43,815
b. $48,703
c. $103,815
d. $47,481
e. None of the above
(ii) Calculate the Net Present Value if the price of this investment is $30,000 and the farmer’s required rate of return is 15% (discount rate) and state if this investment is acceptable.
a. -$17,481; Unacceptable
b. $13,815; Acceptable
c. $8,703; Acceptable
d. $47,481; Acceptable
e. None of the above
(iii) Calculate the yield on this investment if the price of this investment is $30,000 and state if this investment is acceptable if the required rate of return is 15%.
a. 18.2%; Acceptable
b. 22.9%; Acceptable
c. 3.53%; Unacceptable
d. 15%; Acceptable
e. None of the above
(iv) After the farmer has purchased part of the fertilizer business, he discovered that the decrease in fertilizer costs per year was only $1,000 per year instead of the $2,000 he was expecting and he only sold the business for $20,000. Given that he paid $40,000 for the business, what was the true yield?
a. 23.1%
b. 19.21%
c. 15.0%
d. 14.48%
e. None of the above