0-acre vineyard and earn income by selling

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You own a 10-acre vineyard and earn income by selling your grapes to wineries. Your vineyard is

Currently planted to Merlot grapes, but you are thinking of replanting with Syrah grapes because they are commanding a higher market price per ton. Either way, you plan to sell the vineyard 5 years from now (at the end of the year) for 5-times (5x) the annual income (in year 5) from the sale of grapes (that is, you'll get the income from grape sales and then sell the vineyard for 5 times that amount at the end of year 5). However, if you switch to Syrah, it will cost you $100,000 immediately and the vines won't produce any grapes until year 4 (that is, years 1-3 will have no sales if you plant Syrah, but years 4 and 5 will). Use the following information to analyze the decision. From a pure economic standpoint, should you switch to Syrah?

10)

Grape

$/ton

Tons/acre

Discount Rate

Merlot

$1,000

5 tons per acre

15%

Syrah

$3,000

4 tons per acre

15%

a. Yes
b. No
c. I am indifferent

 

 

Reference no: EM13843012

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