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George and Laura Tree are enthusiastic ranchers from Texas that want to invest as farmland owners in the beautiful countryside of southcentral Minnesota. They are

George and Laura Tree are enthusiastic ranchers from Texas that want to invest as farmland owners in the beautiful countryside of southcentral Minnesota. They are interested in buying 160 acres of excellent farm land (existing drainage tile valued at $500/acre with seven years class life remaining and $0 salvage value) with a 95 crop productivity index (CPI) rating, which they then plan to rent to a local grain farmer. The land is set to go to auction on May 1, 2023 and they are inquiring with you as to whether they should or should not buy, how high you think the land could go (currently they are willing to go as high as $13,500 per acre), and what the financing options would be if they were to seek outside financing from your lending institution, an independent community bank specializing in agriculture.

The annual cash flow for this investment will be $305/acre and inflate at the rate of the economy.

Property tax will be $50/acre and the Trees dont qualify for any agricultural homestead deductions due to their status as out of staters.

Their income tax rate is 20%.

The interest rate on debt is ________ (define and defend your answer using high-quality finance related citations as part of the problem, note the Trees are prime borrowers). They plan to finance 70% equity and 30% debt.

Mean average inflation rate is 4%, which we expect will match the increases in farmland cash flow.

The cost of equity capital is 8%.

Please prepare a detailed, professional report for the Trees on the principle and interest payments, their annual straight-line depreciation of the tile, their income taxes, net cash flow, and present value if future value in 15 years is 33,000/per acre, and lastly the NPV. Should the Trees buy the land?

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