Question
Table 1 shows two alternative options for a $20k up-front investment, along with the Net Present Values associated with each. The discount rate used in
Table 1 shows two alternative options for a $20k up-front investment, along with the Net Present Values associated with each. The discount rate used in the table is 4%
| Table 1: Alternative $20k Investments, with PVs | |||||
| Year | Cow/Calf | PV | Grain | PV | |
| Discount Rate | 0 | -$20,000 | -$20,000 | -$20,000 | -$20,000 |
| 4% | 1 | $2,000 | $1,923 | $5,800 | $5,577 |
| 2 | $4,000 | $3,698 | $5,800 | $5,362 | |
| 3 | $6,000 | $5,334 | $5,800 | $5,156 | |
| 4 | $8,000 | $6,838 | $5,800 | $4,958 | |
| 5 | $10,000 | $8,219 | $5,800 | $4,767 | |
| Total: | $10,000 | $6,013 | $9,000 | $5,821 | |
1. What is the NPV of the cow/calf investment assuming a discount rate of 4% and an inflation rate of 2%?
2. What is the NPV of the grain investment with a 4% discount rate and 2% inflation rate?
3. Use the discount rate adjustment method to account for risk in the investments, assuming a 3% risk premium for cow/calf, and a 1% risk premium for grain.
What is the NPV of the cow/calf investment if a 3% risk premium is included (in addition to the discount and inflation rates)?
4. What is the NPV of the grain investment if a 1% risk premium is included (in addition to the discount and inflation rates)?
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Accounting What the Numbers Mean
Authors: David H. Marshall, Wayne W. McManus, Daniel F. Viele,
9th Edition
978-0-07-76261, 0-07-762611-7, 9780078025297, 978-0073527062
