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Advise the company on the course of action it should take Approach: This company must choose one of 3 options and as such this is a mutually exclusive decision scenario. Thus the NPV method is the most suitable technique to use in this situation. Option 1 - Rent the land. This will ensure an annual rental income of €10,000 for the 6 years. This must be discounted to get the present value of this annuity as follows using the annuity tables (12% year 6).
Option 2 - Work the land The following are the relevant cash flows for this option discounted at 12%
Option 3 – Sell the remainder of the lease In this scenario the lease can be sold immediately for €39,000. Thus the NPV of thie option is €39,000 Overall the option with the highest NPV is to rent the land. This option would also be less risky then option 2 as it would be based on a rental agreement whereas option 2 is based on forecast costs and revenue which may not be accurate. The least risky option is option 3 to sell the remainder of the lease although this has the lowest NPV. Overall the company should choose option 1
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