Question

You have the opportunity to spend $80 for fertilization today. If the treatment will allow you

to gain an additional 7 tons at the end of 8 years, should you make the investment if prices

are $15/ton (assume 5.5% discount rate)? Justify your response with the correct numbers

and an explanation of your reasoning

Answer 1

● Investment = $80. Possible gains = 7 tons @ $15/ton; Discount rate = 5.5%; term = 8 years.

With a discount rate of 5.5%, the return on investment of $80 in 8 years should be = $80(1.055)^8

The return on investment should be = $80 x 1.5346 = $122.76.                    [(1.055)^8 = 1.5346]

The return I actually get = $15 x 7 = $105.

Hence, I should not make the investment of $80 in order to gain an additional 7 tons at the end of 8 years.

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