A farmer sows a certain crop. It costs $240,000 to buy the seed, prepare the ground, and sow the crop. In one year's time it will cost $93,200 to harvest the crop. If the crop will be worth $350,000, and the interest rate is 7%, what is the net present value (NPV) of this investment?Question 10Answera.$240,000b.$567,103c.$87,103d.$0
Question
A farmer sows a certain crop. It costs 93,200 to harvest the crop. If the crop will be worth 240,000b.87,103d.$0
Solution
To calculate the Net Present Value (NPV), we need to consider both the initial investment and the future cash inflows.
Step 1: Calculate the initial investment. In this case, the initial investment is the cost to buy the seed, prepare the ground, and sow the crop, which is $240,000.
Step 2: Calculate the future cash inflows. This is the worth of the crop minus the cost to harvest it. So, 93,200 = $256,800.
Step 3: Discount the future cash inflows to present value. The formula to calculate the present value (PV) is PV = FV / (1 + r)^n, where FV is the future value, r is the interest rate, and n is the number of periods. In this case, PV = 239,813.
Step 4: Subtract the initial investment from the present value of future cash inflows to get the NPV. So, NPV = 240,000 = -$187.
So, none of the options provided are correct. The NPV of this investment is -$187, which means the investment is not profitable.
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