During the past year, Stacy McGill planted a new vineyard on 150 acres of land that she leases for $30,000 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 $60,000 each year. For the next 20 years (11–30) she expects the harvest will provide annual revenues of $110,000. But during the last 10 years (31–40) of the vineyard’s life, she estimates that revenues will decline to $80,000 per year. During the first 5 years the annual cost of pruning, fertilizing, and caring for the vineyard is estimated at $9,000; during the years of production, 6–40, these costs will rise to $12,000 per year. The relevant market rate of interest for the entire period is 12%. Assume that all receipts and payments are made at the end of each year.

Based on the various costs that Stacy McGill will incur, and the present value of her revenue, the minimum price that Stacy should accept from Ric Button is $376,595.

What amount should Stacy accept?

This should be the net present value of her vineyard over 40 years.

Present value of revenue from 1 - 5 years is $0 because no grapes will be grown in the vineyard.

Present value of revenue from 6 - 10 years;
= 60,000 x 3.14772

= $188,863.20

Present value of revenue from 11 - 30 years

= 110,000 x 6.40475

= $704,522.50

Present value of revenue from 31 to 40 years:

= 80,000 x 1,28146

= $102,516.80

Then find the present value of the expenses:

Present value of expenses from 1 - 5 years:

= 9,000 x 4.21236

= $37,911.28

Present value of expenses from 6 - 40 years:

= 12,000 x 10.83393

= $130,007.16

Present value of lease:

= 30,000 x 15.04629

= $451,388.70

The minimum amount Stacy should sell for is therefore:

= 188,863.20 + 704,522.50 + 102,516.80 - 37,911.28 - 130,007.16 - 451,388.70

= $376,595.

Question is:

Eric 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?

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