Crab Key Animal Research Company breeds and raises livestock and acts as a supplier of animals for the clothing industry. Crab Key has recently been contacted by Santa Claus who is interested in replacing his current set of reindeer with younger and stronger ones. Santa wants to purchase 10 deer each of the next three years (beginning one year from today).

Reindeer need a cold environment with little humidity and a substantial amount of evergreen bushes to thrive. Reindeer also eat substantial amounts of corn. Crab Key has located a small island between Baffin Island and Greenland that will be perfect. Crab Key will raise the deer over the next three years and ship them to the North Pole when they are able to fly.

The owners of the island have offered to sell it to Crab Key for $400,000. Crab Key would also be faced with additional equipment costs of $800,000 for barns, breeding sheds, and feeding machines.

Santa will make payments in terms of US dollars. The following estimates have been made by Crab Key:

Year	One	Two	Three
Revenues	$1,200,000	$1,240,000	$1,425,000
Operating Expenses (excluding depreciation)	$590,000	$693,000	$728,000
Depreciation Percentages	25%	55%
Interest Expense	$83,000	$81,000	$89,000
Tax Rate	20%	20%	20%

The initial investment will be financed with a $700,000 bond issue: the coupon rate is 4.12%, three years until maturity, and a price of $988. The remainder of capital will consist of an issue of common stock priced at $46. Crab Key pays a current dividend of $3.42 with an expected growth rate in dividends of 4.9%.

Remember that land cannot be depreciated. Crab Key will replenish the evergreen population at the end of year 2 by investing $100,000. Crab Key also expects to purchase a small island nearby at the end of year 3 that is owned by the Canadian government for CAD 100,000. Current spot rate is CAD 1.33/USD, but Crab Key expects the USD to depreciate by 4.1% per year.

Crab Key also purchases a call option to buy yet another island. Details of the option are as follows: Option price today is $50,000 with the right to buy the island for $600,000 at any time during the next five years. This island will be used for housing any reindeer that fail to develop acceptable flying skills.

Santa considers using a futures contract to hedge to reindeers consumption of corn. Describe the manner in which Santa would use futures contracts AND describe how Santa would incorporate this process into the computation of net present value. No calculations required.