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An investor is planning to buy a run-down cocoa farm in a cocoa growing area for 5 million. The plantation of about 20 acres has purposed...
An investor is planning to buy a run-down cocoa farm in a cocoa growing area for 5 million. The plantation of about 20 acres has purposed built-houses, offices, warehouses and a network of roads. On purchase, he will immediately replant the entire plantation with a new variety of cocoa seedlings, which mature in 4 years at a cost of 2 million. It is estimated that he will be spending 700,000 p.a. on maintenance of the roads. In 8 years' time from now, all the infrastructure and buildings will be rehabilitated at an estimated cost of 4,500,000. The investor required rate of return is 83/4% and has calculated his risk premium to be 4%. Income from the investment is expected to be 2 million per annum for four years and then reduced to 1.5million per annum for the rest of the investment period. The economic lifespan of the seedlings from maturity is estimated at 6 years.i . Calculate the total cost of the investment at the time the cocoa reaches maturity.ii. How can the investor make provision for the rehabilitation cost and what will be the effect on the net income?iii. Should the investor undertake the investment? Why?
