Question
A farmer has the opportunity to purchase an advanced guidance system for precision farming. This is the advertisement: New Outback MAX Guidance System Outback MAX
A farmer has the opportunity to purchase an advanced guidance system for precision farming. This is the advertisement:
New Outback MAX Guidance System
Outback MAX with Outback ConnX introducing the next generation Outback Guidance system that redefines simplicity in precision farming.
The farmer believes that the guidance system that can be purchased for $5,500 will improve corn production by 220 bushels per year. He plans to keep the Guidance system for 8 years. At the end of 8years he believes he can sell it for $1,000. The farms accountant has done some preliminary work. The marginal tax rate is 25%, the pre-tax risk adjusted discount rate is 8% and inflation is assumed to be zero. The account calculates the present value of the tax savings from depreciation to be $1,067.31, and the present value of the after-tax terminal value to be $470.56. The price of corn is expected to be $4.30/bushel over the 8 years.
(i) Calculate the additional after-tax net returns from corn production if the farmer purchases the guidance system.
A. $900
B. $709
C. $270
D. $750
E. None of these answers
Enter Response Here:
(ii) Calculate the after-tax risk adjusted discount rate.
A. 6.0%
B. 12%
C. 3.6%
D. 1.25%
E. None of these answers
Enter Response Here:
(iii) Calculate the present value of the additional after-tax net returns from corn production if the farmer purchases the guidance system.
A. $5,932
B. $1,779
*C. $4,406
D. $2,963
E. None of these answers
Enter Response Here:
(iv) Calculate the NPV of the guidance system.
A. $156
B. $1100
C. $445
D. $444
E. None of these answers
Enter Response Here:
(v) Calculate the break-even improvement in corn production (yield) if the farmer purchases the guidance system.
A. $150
B. $198
C. $140
D. $170
E. None of these answers
Please help by explaining the process.
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