(Purchase Price of a Business) During the past year, Nicole Bobek planted a new vineyard on 150...
Question:
(Purchase Price of a Business) During the past year, Nicole Bobek planted a new vineyard on 150 acres of land that she leases for $27,000 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), Nicole 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 $100,000. 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 $10,000 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.
Instructions Dick Button has offered to buy Nicole’s vineyard business by assuming the 40-year lease. On the basis of the current value of the business, what is the minimum price Nicole should accept?
Step by Step Answer:
Intermediate Accounting
ISBN: 9780471448969
11th Edition
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield