TIME VALUE OF MONEY PROBLEM

Stacy McGill has planted a new vineyard on 150 acres of land that she leases for $30,000 a year. She wants to determine the value of the vineyard. The vineyard will bear no grapes for the first 5 years (15). In the next five years (610), Stacy estimates that the vines will bear grapes that can be sold for $115,000 each year. For the final 10 years of the lease (1120), the harvest will provide annual revenues of $195,000.

During the first 5 years the annual cost of pruning, fertilizing, and caring for the vineyard is estimated at $10,000; during the years of production 620, these costs will rise to $15,000 per year. The relevant market rate of interest for the entire period is 12%. Assume that all receipts and payments are made at the end of each year.

Mr. Buyer has offered to buy Stacys vineyard business by assuming the 20year lease. What is the minimum price Stacy should accept?