A farmer sows a certain crop. It costs $250 000 to buy the seed, prepare the ground and sow the crop. In one year's time it will cost $110 000 to harvest the crop. If the crop will be worth $380 000, and the interest rate is 7.5%, what is the net present value (NPV)of this investment?

Question

Quizplus · Accepted Answer

To find the NPV, we need to calculate the present value (PV) of all cash flows and subtract the initial investment ($250 000) from it.

PV of cost to prepare and sow crop = $250 000
PV of cost to harvest crop in one year = $110 000 / 1.075 (to bring it back to present value) = $102 325.58
PV of revenue from crop in one year = $380 000 / 1.075 = $353 488.37

NPV = PV of all cash flows - initial investment
NPV = $353 488.37 + $102 325.58 - $250 000 - $110 000
NPV = $95 813.95

Since the NPV is positive, this investment is profitable and the best choice is B.

A Farmer Sows a Certain Crop