Mr. Agirich of Aggie Farms is thinkingabout investing in a center pivot irrigation system to irrigate 100acres of land. The irrigation system costs $70,000. Mr. Agirichexpects that the irrigation system will increase yield and thusoperating receipts by $15,000 per year but it will cost $4,000 ayear to pay for electricity, maintenance, and additional labor. Mr.Agirich plans on keeping the irrigation system for 4 years beforereplacing it with a new one and he thinks he can sell it for$50,000 at the end of 4 years. Assume that the Mr. Agirich expectsthat the inflation rate will be 4% and that operating receipts,operating expenses, and terminal value will increase at the rate ofinflation (i.e., operating receipts, operating expenses andterminal value are stated as real dollars, thus, you must convertthem to nominal dollars) . The bank has offered to lend Mr. Agirich$60,000. The loan will be fully amortized at a 10% interest rateover six years (annual payments). Mr. Agirich anticipates that hismarginal tax rate over the next four years will be 20%. The IRSwill allow Aggie Farms to depreciate the investment usingstraight?line over 10 years. Mr. Agirich requires at least a 13%pre-tax, risk-free return on capital and a 2% risk premium onprojects of comparable risk to the irrigation system.

           A.        Lay out the cash flowsfor the investment.

           B.        Calculate the netpresent value. [NPV=-$1,323.25]

           C.        Discuss whether or notthe irrigation system is a profitable investment.

D.        Evaluate thefinancial feasibility of this investment. Would there be apotential liquidity problem if the investment was profitable?Explain.