You are moving back to the family farm and looking to buy some farmland of your own. Your neighbors are selling a 160 acre parcel with an asking price of $1,200 per acre. You estimate the land generates current (i.e. in period zero) net cash flow of $70 per acre, your nominal cost of capital is 6% and your planning horizon is 15 years. You expect current returns to remain constant and land values to grow by 1% per year.
(a) Evaluate the profitability (Net Present Value) of this farmland investment assuming no taxes and no debt financing (i.e. you will pay for the entire purchase up front). Prepare a table of actual and discounted cash flows similar to the one presented in class.
(b) Find the maximum price per acre and the maximum price for the parcel you can afford to pay in order to earn an 7% rate of return.