A farmer is thinking about investing in a center pivot irrigation system to irrigate 80 acres...

50.1K

Verified Solution

Question

Finance

A farmer is thinking about investing in a center pivotirrigation system to irrigate 80 acres of land in Fresno. With anirrigation system, operating expenses would increase by $75 peracre due to electricity, maintenance and additional labor. It isestimated that the irrigation will increase yields and thisoperating receipts by $150 per acre. The cost of drilling a wellwould be $8,200 and the cost for the center pivot irrigation systemwould be $31,000. The irrigation system would be ¼ mile long andwould irrigate 80 acres. Suppose that the farmer wants to evaluatethis investment over a five-year period of time. The farmerbelieves that if he sold the farm in five years, the irrigationsystem would add $31,000 to the sale price. The farmer anticipatesthat his marginal tax rate over the next six years will be 15%. TheIRS will allow the farmer to depreciate the investment usingstraight line over 15 years. Assume that the terminal value of thisinvestment is $31,000 at the end of five years. The farmer requiresa 10% return to capital (pretax).
                          Calculate the initial cost
                          Calculate the after-tax net returns
                          Calculate the tax savings from depreciation
                          Calculate the after-tax terminal value
Suppose the discount rate is 8.5%. Using information from youanswers above, what is the NPV for the investment?

Answer & Explanation Solved by verified expert

4.1 Ratings (651 Votes)

Answer a Initial cost cost of drilling well cost for the center pivot irrigation system 8200 31000 39200 Answer b Annual aftertax net returns See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

A farmer is thinking about investing in a center pivotirrigation system to irrigate 80 acres of land in Fresno. With anirrigation system, operating expenses would increase by $75 peracre due to electricity, maintenance and additional labor. It isestimated that the irrigation will increase yields and thisoperating receipts by $150 per acre. The cost of drilling a wellwould be $8,200 and the cost for the center pivot irrigation systemwould be $31,000. The irrigation system would be ¼ mile long andwould irrigate 80 acres. Suppose that the farmer wants to evaluatethis investment over a five-year period of time. The farmerbelieves that if he sold the farm in five years, the irrigationsystem would add $31,000 to the sale price. The farmer anticipatesthat his marginal tax rate over the next six years will be 15%. TheIRS will allow the farmer to depreciate the investment usingstraight line over 15 years. Assume that the terminal value of thisinvestment is $31,000 at the end of five years. The farmer requiresa 10% return to capital (pretax). Calculate the initial cost Calculate the after-tax net returns Calculate the tax savings from depreciation Calculate the after-tax terminal valueSuppose the discount rate is 8.5%. Using information from youanswers above, what is the NPV for the investment?