Problem Set 6 Key

# Problem Set 6 Key - AAE 320 Farming Systems Management...

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AAE 320 Farming Systems Management Problem Set #6 Key 1) Answer the following questions using methods from the time value of money section. Show your work for potential partial credit. a) How much would \$7,000 invested at 7% compounded annually be worth in 7 years? FV = PV(1 + r) t = 7000(1 + 0.07) 7 = \$11,240.47 b) Suppose you will replace your irrigation well in 5 years at a cost of \$40,000 then. You made lots of money this year marketing your grain, and so can set the money aside now. How much money invested this year at 6% interest compounded annually would be worth \$40,000 in 5 years? Suppose you could only find an investment offering 3% interest compounded annually, how much would you have to invest at this rate today to have \$40,000 in 5 years? PV = FV/[(1 + r) t ] = 40000/[(1 + 0.06) 5 ] = \$29,890.33 40000/[(1 + 0.03) 5 ] = \$34,504.35 c) Suppose you could buy a plot of land today at \$3,500/ac and sell it in 3 years for \$5,000, paying cash for the land by withdrawing equity from your farm. What is your rate of return, expressed as an annually compounded interest rate? If you typically earn 8% annual return on your equity, is this a good deal if you are trying to make as much money as possible, or should you leave the equity in your farm? r = (FV/PV) 1/t – 1 = (5000/3500) 1/3 – 1 = 0.1262 = 12.62% Compared to the 8% return earned on equity in the farm, this is a good investment. d) Assuming a 10% discount rate, what is the net present value of a strawberry patch that costs

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Problem Set 6 Key - AAE 320 Farming Systems Management...

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