Question
Suppose a farmer contacts you to consult on the price that he/she can pay for a 650-hectare neighbouring irrigation farm. The farmer expects that the farm will generate an average net farm income of R10 000 000 per annum. To generate this income, additional investments in livestock and machinery of R4 050 000 are required. The farmer’s weighted average cost of capital for the farm is 8.5% and the farm should contribute R35 250 per month towards covering the living expenses of the farmer and his family. Calculate the price per ha that he should not exceed.
A.
None of the above
B.
R113 214 705.88
C.
R167 108.60
D.
R11 103.17
E.
R108 620 588.24
A.
None of the above
B.
R113 214 705.88
C.
R167 108.60
D.
R11 103.17
E.
R108 620 588.24
Answers
GPT-4o mini
To determine the price per hectare that the farmer should not exceed when purchasing the irrigation farm, we first need to calculate the value of the farm based on the expected net income, the required investments, financing costs, and the living expenses.
Here are the steps for the calculations:
1. **Calculate Annual Living Expenses**:
The farm must contribute R35,250 per month towards covering living expenses.
\[
\text{Annual Living Expenses} = R35,250 \times 12 = R423,000
\]
2. **Calculate Total Net Income Required**:
The farmer expects a net farm income of R10,000,000. However, we need to consider the contribution to living expenses as well.
\[
\text{Total Required Income} = \text{Net Farm Income} + \text{Annual Living Expenses}
\]
\[
\text{Total Required Income} = R10,000,000 + R423,000 = R10,423,000
\]
3. **Calculate Required Return Based on Cost of Capital**:
The farmer's weighted average cost of capital is 8.5%. Thus, we can calculate the total investment required to generate this total income:
\[
\text{Required Return} = \text{Total Required Income} / \text{Cost of Capital}
\]
\[
\text{Required Return} = R10,423,000 / 0.085 = R122,626,470.59
\]
4. **Consider Additional Investments**:
The farmer needs to make additional investments of R4,050,000 in livestock and machinery.
\[
\text{Total Investment} = \text{Required Return} + \text{Additional Investments}
\]
\[
\text{Total Investment} = R122,626,470.59 + R4,050,000 = R126,676,470.59
\]
5. **Calculate Price per Hectare**:
The farm being considered is 650 hectares. Therefore, we can now calculate the price per hectare that the farmer should not exceed:
\[
\text{Price per hectare} = \text{Total Investment} / \text{Total Hectares}
\]
\[
\text{Price per hectare} = R126,676,470.59 / 650 \approx R194,981.40
\]
As we can observe, none of the options match this amount; hence, the answer might be:
**A. None of the above**.
However, make sure to review the calculations and assumptions made. If there’s anything that has been miscalculated or any adjustments needed based on further details from the farmer's side, the outcomes could change.
Here are the steps for the calculations:
1. **Calculate Annual Living Expenses**:
The farm must contribute R35,250 per month towards covering living expenses.
\[
\text{Annual Living Expenses} = R35,250 \times 12 = R423,000
\]
2. **Calculate Total Net Income Required**:
The farmer expects a net farm income of R10,000,000. However, we need to consider the contribution to living expenses as well.
\[
\text{Total Required Income} = \text{Net Farm Income} + \text{Annual Living Expenses}
\]
\[
\text{Total Required Income} = R10,000,000 + R423,000 = R10,423,000
\]
3. **Calculate Required Return Based on Cost of Capital**:
The farmer's weighted average cost of capital is 8.5%. Thus, we can calculate the total investment required to generate this total income:
\[
\text{Required Return} = \text{Total Required Income} / \text{Cost of Capital}
\]
\[
\text{Required Return} = R10,423,000 / 0.085 = R122,626,470.59
\]
4. **Consider Additional Investments**:
The farmer needs to make additional investments of R4,050,000 in livestock and machinery.
\[
\text{Total Investment} = \text{Required Return} + \text{Additional Investments}
\]
\[
\text{Total Investment} = R122,626,470.59 + R4,050,000 = R126,676,470.59
\]
5. **Calculate Price per Hectare**:
The farm being considered is 650 hectares. Therefore, we can now calculate the price per hectare that the farmer should not exceed:
\[
\text{Price per hectare} = \text{Total Investment} / \text{Total Hectares}
\]
\[
\text{Price per hectare} = R126,676,470.59 / 650 \approx R194,981.40
\]
As we can observe, none of the options match this amount; hence, the answer might be:
**A. None of the above**.
However, make sure to review the calculations and assumptions made. If there’s anything that has been miscalculated or any adjustments needed based on further details from the farmer's side, the outcomes could change.