Cairns Farming is a small family run dairy farm, which is finding it hard to continue in business. After visiting a farm in Nienberg, Germany, it is considering buying equipment that will enable it to produce electricity on the farm by converting manure into biogas. There is a $10 000 local government grant available for such projects (so if it goes ahead $10 000 of the cost will be paid by the government, effectively reducing the cost to Cairns Farming). Costs to date and equipment needed are given below, along with the benefits:

i The cost of the fact-finding trip to Nienberg, Germany, made by Mr Cairns earlier in the year was $4000.

ii The farm will need to install a digester and generator building (with a tank to collect the cow manure and keep it for 3 weeks at 38 degrees Celsius to produce methane gas) – cost to install $650 000. (Estimated life 20 years).

iii Purchase and installation of modified natural gas engine to convert methane to electricity $45 000. (Estimated life 20 years).

iv The electricity generated will replace 50 per cent of Cairns Farming’s own needs. Currently it pays 30 cents per kWh

(kilowatt hour) and use 40 000 kWh per year.

v In addition, it will sell enough power for 200 homes to the local electricity grid which will total 975 000 kWh at 20 cents per kWh.

vi The business’s required rate of return (cost of capital) is 10 per cent.

vii Cairns Farming has previously preferred all capital expenditure items to pay for themselves (payback) within three years.

Required:

a Calculate the total relevant cost of the project.

b Calculate the total cash inflows/savings of the project.

c Assume all costs (for all equipment) are incurred at the start of the project and annual cash flows occur at the end of each year. Calculate the net present value of the project.

d Calculate the payback period of the project.

e Based on these calculations alone, should Cairns Farming invest in the building and equipment? Use your calculations to justify your answer.
f Are there any non-economic considerations in making this decision?