An investment company is considering buying an almond orchard in California's Central Valley for $150 million. The annual profit from this orchard depends on the annual rainfall: a loss of $2 million in a “dry” year, a profit of $20 million in a “wet” year, and a profit of $5 million in an “average” year. Meteorological records indicate that over the last 100 years there have been 26 “dry” years, 30 “wet” years, and 44 “average” years. Assume the annual profits, measured in real dollars, begin to accrue at the end of the first year. Using the meteorological records as a basis for prediction, what are the net benefits of the orchard if the real discount rate is 5 percent?

a. Is this a good investment, if the orchard bears fruit forever? Show your work.

b. What is the NPV of this investment if the orchard bears fruit for only 30 years, I.e. it is worthless (zero salvage value) after 30 years?

c. Use several alternative discount rate values to investigate the sensitivity of the present value of net benefits of the orchard in exercise (1) to the assumed value of the real discount rate. Assuming a 30-year horizon for the orchard, at what discount rate would the present value of the expected net benefits equal zero? Show your work.