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

$143,200

to harvest the crop. The farmer's best estimate is that the crop will be worth

$400,000

in one year. The farmer can borrow and lend at an interest rate is

7%.

Part A)The net present value (NPV) of the farmer's decision to proceed with this investment is closest to which of the following?

A.

$0

B.

$613,832

C.

$133,832

D.

$240,000

Part B)The farmer is concerned about the uncertainty surrounding the price that she will receive for her harvested crop in one year. She has the opportunity to enter into a forward agreement whereby she can lock-in a sale price of

$425,000

for her harvested crop in one year, thus eliminating any uncertainty. The cost of entering into this contract is $23,500, payable

today.

Should the farmer enter into this forward agreement and lock-in the sale price of her harvested crop?

A.

Yes, she should enter into this agreement.

B.

No, she should not enter into this agreement,

Part C)What price would the farmer need to pay for the forward agreement described in Part B such that the NPV of her overall farming investment would be unchanged from that calculated in Part A?

Price of forward contract such that NPV is unchanged:

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