(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? Should the investor undertake the investment? Why?
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
(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?
Should the investor undertake the investment? Why?
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