Question
Tropicana hires you to value orange groves that produce 1.6 billion oranges per year. oranges currently sell for $0.10 per 100. Assume that no unexpected
Tropicana hires you to value orange groves that produce 1.6 billion oranges per year. oranges currently sell for $0.10 per 100. Assume that no unexpected hard freezes will occur, and that this level of production can be sustained with normal maintenance. Variable costs are $1.2 million per year, and fixed costs are negligible. The nominal discount rate is 18%, and the inflation rate is 10%.
1) Assuming that orange prices and the variable costs change with inflation, what is the value of the groves? (Ignore taxes and depreciation)
2. Suppose prices increase at the inflation rate, but costs increase at half the inflation rate. What is the value of the orange groves?
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