You want to value a property by estimating the value of repeated agricultural projects on the property.
Question:
You want to value a property by estimating the value of repeated agricultural projects on the property. A project will begin today and be complete 3 years later, after which a new project with the same cashflows will be immediately re-initiated.
Each project has the following cash-flows:
Year | 0 | 1 | 2 | 3 |
Cash Flow | -990 | 500 | 500 | 500 |
The appropriate annual discount rate is 8%
NPV = 298.548
Now assume that this same project is repeated every 3 years on the property as described. After the final harvest at the end of the third year, the same project (with the same cashflows) is initiated immediately. This project can be repeated every 3 years in perpetuity.
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7+ |
Project 1 Initiated | Project 1 Concluded | |||||||
Project 2 Initiated | Project 2 Concluded | |||||||
Project 3 Initiated | ... |
What is value of the property? (i.e. what is the perpetual value of the sequence of projects?)
Remember that the timing of Part 1 is such that you find the present value of a single project as of the beginning of the year it is initiated. (0+ decimal)
Fundamentals of Financial Management
ISBN: 978-0324597707
12th edition
Authors: Eugene F. Brigham, Joel F. Houston