Farmland An available tract of cleared land in East Texas has come to your attention. The land can produce a crop of cattle every year with an expected average net value of $8,000. If trees are planted, a timber crop can be harvested in 20 years with an expected net value of $300,000. Because the goal of a potential farmland investment is income, well use the yield of a high-grade corporate bond portfolio for the threshold rate/ discount rate; assume high grade corporate bonds are currently yielding 4.50%. In this exercise, well value the land over a 100 year timeframe.

a. Find the present value of the land if it is continually used to grow timber. Over a one hundred year timeframe, this will consist of the sum of five individual present value calculations at 20, 40, 60, 80, and 100 year periods.

b. Find the present value of the land if it is continually used to grow cattle.

c. If the land is priced at $200,000, would you consider it a good investment? Comment on how this price compares to the valuations you calculated, and comment on the effect of risk (income variability) on the investment decision.

d. If the land is priced at $200,000 and you expect bond interest rates to rise to 6% within the next five years, would you consider this land a good investment in either use? Calculate the present value again, using the alternate scenario column in the spreadsheet. Explain your answer with reference to the Bocephus Principle (i.e. the general relationship between asset values and interest rates).