Reference no: EM13839060
Fred and Frieda have always wanted to enter the blueberry business. They locate a 50- acre piece of hillside in Maine that is covered with blueberry bushes. They figure that the annual yield from the bushes will be 200 crates. Each crate is estimated to sell for $400 for the next 10 years. This price is expected to rise to $500 per crate for all sales from years 11 through 20.
In order to get started, Fred and Frieda must pay $150,000 for the land plus $20,000 for packing equipment. The packing equipment will be depreciated on a straight-line basis to a zero estimated salvage value at the end of 20 years. Fred and Frieda believe that at the end of 20 years, they will want to retire to Florida and sell their property.
Annual operating expenses, including salaries to Fred and Frieda and exclusive of depreciation, are estimated to be $50,000 per year for the first 10 years and $60,000 thereafter. The land is expected to appreciate in value at a rate of 5 percent per year. The couple's marginal tax rate is 30 percent for both ordinary income and capia.
a. If the couple requires at least a 13 percent return on their investment, should they enter the blueberry business?
b. Assume that the land can be sold for only $50,000 at the end of 20 years (a capital loss of $100,000). Should the couple invest in the land and blueberry business? (Assume that the couple may claim the full amount of their capital loss in the year it occurs year 20)
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