Reference no: EM13843012

You own a 10-acre vineyard and earn income by selling your grapes to wineries. Your vineyard is

Currently planted to Merlot grapes, but you are thinking of replanting with Syrah grapes because they are commanding a higher market price per ton. Either way, you plan to sell the vineyard 5 years from now (at the end of the year) for 5-times (5x) the annual income (in year 5) from the sale of grapes (that is, you'll get the income from grape sales and then sell the vineyard for 5 times that amount at the end of year 5). However, if you switch to Syrah, it will cost you $100,000 immediately and the vines won't produce any grapes until year 4 (that is, years 1-3 will have no sales if you plant Syrah, but years 4 and 5 will). Use the following information to analyze the decision. From a pure economic standpoint, should you switch to Syrah?

10)

Grape	$/ton	Tons/acre	Discount Rate
Merlot	$1,000	5 tons per acre	15%
Syrah	$3,000	4 tons per acre	15%

a. Yes
b. No
c. I am indifferent