During the past year, Stacy McGill planted a new vineyard on 150 acres

P6-6 During the
past year, Stacy McGill planted a new vineyard on 150 acres of land that she
leases for $30,000 a year. She has asked you, as her accountant, to assist her
in determining the value of her vineyard operation.
The vineyard
will bear no grapes for the first 5 years (1-5). In the next 5 years (6-10),
Stacy estimates that the vines will bear grapes that can be sold for $60,000
each year. For the next 20 years (11-30), she expects the harvest will provide
annual revenues of $110,000. But during the last 10 years (31-40) of the
vineyard’s life, she estimates that revenues will decline to $80,000 per year.
During the first
5 years, the annual cost of pruning, fertilizing, and caring for the vineyard
is estimated at $9,000; during the years of production, 6-40, these costs will
rise to $12,000 per year. The relevant market rate of interest for the entire
period is 12%. Assume that all receipts and payments are made at the end of
each year.

Instructions
Dick Button has
offered to buy Stacy’s vineyard business by assuming the 40-year lease. On the
basis of the current value of the business, what is the minimum price Stacy
should accept?