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Dave and Nancy want to expand their cow/calf operation by buying more land and using...

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Finance

Dave and Nancy want to expand their cow/calf operation by buying more land and using a new pasture rotation method. The cost of this expansion will be $275,000, of which $115,000 is non-depreciable assets. $60,000 is five year property, and $100,000 is ten year property. The expansion will allow them to increase their operation by 325 calves. Dave and Nancy will receive $450 for each calf sold and incur direct costs of $350 per calf. They expect an annual growth rate in both receipts and expenses of 3%. The income tax rate is 20%. The terminal value (net of all capital gains taxes) after ten years will be $150,000. The time horizon is 10 years. Depreciation is based on the MACRS, 150% declining balance with switch to the straight-line method and one-half first year convention. If after-tax discount rate is 8%, should they make the expansion?

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