A farmer is deciding when to plant a cash crop. Fixed costs are ₦500 000 and variable costs are ₦120 000 per hectare. Expected yield is 8 tonnes per hectare. The current market price is ₦80 000 per tonne and is projected to rise by 5 % each year for the next three years. The discount rate is 10 % per annum.

Option A: Plant now (year 0) and harvest at the end of year 1.
Option B: Wait one year, plant at the start of year 1 and harvest at the end of year 2.

Calculate the net present value (NPV) of each option and state which option gives the higher NPV.

Question

A farmer is deciding when to plant a cash crop. Fixed costs are ₦500 000 and variable costs are ₦120 000 per hectare. Expected yield is 8 tonnes per hectare. The current market price is ₦80 000 per tonne and is projected to rise by 5 % each year for the next three years. The discount rate is 10 % per annum.

Option A: Plant now (year 0) and harvest at the end of year 1.
Option B: Wait one year, plant at the start of year 1 and harvest at the end of year 2.

Calculate the net present value (NPV) of each option and state which option gives the higher NPV.

Accepted Answer

Wait one year; NPV = 20000 (higher than planting now)

Neco Model Questions Vol1 2020 Agricultural Science Question 13

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