(10 points) You are considering buying a 150 -acre farm you have been renting for several years. The farm has been offered to you privately (i.e., you do not have to compete with other buyers) for $2,050 /acre. Because you are familiar with the yield history and production costs on the land, you are confident that your future net returns would be similar to those you have had in the past. You have had the 150 acres in a 50-50 corn-soybean rotation and expect to continue that rotation in the future. Your yield and financial records for the past six years are below. (These production costs on the rented land do not include the rent paid, nor do they include your own labour expenses.) If you purchase this land, it would be added to the 300 acres that you already own. Your goal is to average $30,000 a year for living expenses and debt repayment from your current cropping enterprises. You want to continue averaging this amount into the future. You are considering this land purchase well into your farming career and are thinking of retiring within the next ten years. Therefore, you are considering the purchase as a potential part of your retirement plan. a. (2 points) Calculate the average net return per acre for corn, soybeans, and for the 5050 corn-soy rotation, including the cost of your own labour and management. b. (2 points) Using a capitalisation rate of 5%, what is the value of the land using the income capitalisation method? c. (3 points) If you consider selling the 150 acres in ten years for your retirement, what is the value of the land? Assume the asking price of $2,050 is an accurate reflection of the land market and that land prices increase by an average of 6% per year for the next ten years. Use a discount rate of 7% and the modified income capitalisation method. d. (3 points) Would you purchase this farm? Why or why not? (10 points) You are considering buying a 150 -acre farm you have been renting for several years. The farm has been offered to you privately (i.e., you do not have to compete with other buyers) for $2,050 /acre. Because you are familiar with the yield history and production costs on the land, you are confident that your future net returns would be similar to those you have had in the past. You have had the 150 acres in a 50-50 corn-soybean rotation and expect to continue that rotation in the future. Your yield and financial records for the past six years are below. (These production costs on the rented land do not include the rent paid, nor do they include your own labour expenses.) If you purchase this land, it would be added to the 300 acres that you already own. Your goal is to average $30,000 a year for living expenses and debt repayment from your current cropping enterprises. You want to continue averaging this amount into the future. You are considering this land purchase well into your farming career and are thinking of retiring within the next ten years. Therefore, you are considering the purchase as a potential part of your retirement plan. a. (2 points) Calculate the average net return per acre for corn, soybeans, and for the 5050 corn-soy rotation, including the cost of your own labour and management. b. (2 points) Using a capitalisation rate of 5%, what is the value of the land using the income capitalisation method? c. (3 points) If you consider selling the 150 acres in ten years for your retirement, what is the value of the land? Assume the asking price of $2,050 is an accurate reflection of the land market and that land prices increase by an average of 6% per year for the next ten years. Use a discount rate of 7% and the modified income capitalisation method. d. (3 points) Would you purchase this farm? Why or why not
