13. Dave and Nancy want to expand their cow/calf operations by buying more land and using a new pasture rotation method. The cost of this expansion will be $275,000. $115,000 is non-depreciable assets, $60,000 is 5 -year property, and $100,000 is 10 -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 interest rate on debt is 8%. The terminal value (net of all capital gains) after 10 years will be $150,000. The time horizon is 10 years. Depreciation is based on the modified ACRS, 150% declining balance with switch to the straight-line method and one-half first year convention. a. If they make a down payment of 25% of the expansion and finance the rest, should they make the expansion at an after tax discount rate of 10% ? Assume one fixed payment per year. b. What is the MIRR of the expansion? 14. Luann and Dave Broilermaker are building 3 new broiler houses. They will house 20,000 broilers in each flock (house) and expect 6.5 flocks per year. Luann and Dave also expect a 5% death loss. Each broiler will weigh 4.0lb. and sell for 0.04 cents per pound. Direct costs per broiler will be 0.043 cents. They will invest $30,000 in land which is non-depreciable. They will also spend $10,200 on property with a 3-year depreciable life and $60,400 on property with a 10 -year depreciable life. The estimated terminal value (net of all capital gains taxes) at the end of 12 years is $35,000. They will finance 70% of the total investment with debt at an interest rate of 9%. Their income tax rate is 30% and after-tax discount rate is 12%. They expect annual growth rates in receipts and expenses of 2%. The time horizon in 12 years. Depreciation is based on the modified ACRS, 150% declining balance with switch to straight-line method and onehalf first year convention. a. Determine the NPV and IRR for the investment. Should Luann and Dave make the investment? Why? b. What is the MIRR of the investment? 13. Dave and Nancy want to expand their cow/calf operations by buying more land and using a new pasture rotation method. The cost of this expansion will be $275,000. $115,000 is non-depreciable assets, $60,000 is 5 -year property, and $100,000 is 10 -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 interest rate on debt is 8%. The terminal value (net of all capital gains) after 10 years will be $150,000. The time horizon is 10 years. Depreciation is based on the modified ACRS, 150% declining balance with switch to the straight-line method and one-half first year convention. a. If they make a down payment of 25% of the expansion and finance the rest, should they make the expansion at an after tax discount rate of 10% ? Assume one fixed payment per year. b. What is the MIRR of the expansion? 14. Luann and Dave Broilermaker are building 3 new broiler houses. They will house 20,000 broilers in each flock (house) and expect 6.5 flocks per year. Luann and Dave also expect a 5% death loss. Each broiler will weigh 4.0lb. and sell for 0.04 cents per pound. Direct costs per broiler will be 0.043 cents. They will invest $30,000 in land which is non-depreciable. They will also spend $10,200 on property with a 3-year depreciable life and $60,400 on property with a 10 -year depreciable life. The estimated terminal value (net of all capital gains taxes) at the end of 12 years is $35,000. They will finance 70% of the total investment with debt at an interest rate of 9%. Their income tax rate is 30% and after-tax discount rate is 12%. They expect annual growth rates in receipts and expenses of 2%. The time horizon in 12 years. Depreciation is based on the modified ACRS, 150% declining balance with switch to straight-line method and onehalf first year convention. a. Determine the NPV and IRR for the investment. Should Luann and Dave make the investment? Why? b. What is the MIRR of the investment
