1 Currently you own and farm 950 acres of wheat. Your neighbor Frank has offered you the opportunity to rent 300 acres of his farm for $55 per acre. You expect Frank's operating costs to be 10% higherthan the costs on your 950 acres of wheat. Your operating costs on your 950 acres of wheat is $165.00 per acre. Frank's land is somewhat better than yours and you expect to get a yield of 55 bushelsper acre on Frank's land (the yield on your 950 acres of wheat is 33 bu per acre). Frank's land will also provide a small grain pasture benefit that you estimate at $38 per acre. Frank will only let you use1/3 of the land for pasture. You will need to farm the land at night and on weekends and you estimate that this will cost you 500 hours of lost work from your job at the local mill where you earn a wageof $17.00 per hour. In this rental agreement, Frank will pay for 2/3 of the production costs and will take 3/5 of the grain revenue. The price of wheat is $5.00 per bu. NOTE: Ignore any changes in repair,depreciation, or interest costs from increased equipment use.Additional Revenues(A) x 55 x 300 Bx (36)Costs ReducedTotal BenNet Benefit(0What is the value of AAdditional Costs(C) x 300+ (D) x 165x (300)Revenues Reduced(F) x 17.00Total Cost

Decision making is a process which incudes evaluation of current and potential option along with the…

Answered: Currently you own and farm 950 acres of…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 13P

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