Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

This question has multiple parts. A farmer sows a certain crop. It costs $210,000 to buy the seed, prepare the ground, and sow the crop.

image text in transcribed
This question has multiple parts. A farmer sows a certain crop. It costs $210,000 to buy the seed, prepare the ground, and sow the crop. In one year's time it will cost $161,100 to harvest the crop. The farmer's best estimate is that the crop will be worth $390,000 in one year. The farmer can borrow and lend at an interest rate is 9% Part A) The net present value (NPV) of the farmer's decision to proceed with this investment is closest to which of the following? O A $147,798 OB $567,798 OC. $210,000 D. $0 Part B) The former 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 $415,000 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? OA Yes, she should enter into this agreement. OB. No, she should not enter into this agreement, Part) 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: $(please round your answer to the nearest dollar)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

How Finance Works

Authors: Mihir Desai

1st Edition

1633696707, 978-1633696709

More Books

Students also viewed these Finance questions

Question

Identify the major criticisms of neurofinance research.

Answered: 1 week ago