A farmer is thinking about investing in a center pivot irrigation system to irrigate 100 acres of land in Fresno. With an irrigation system, operating expenses would increase by $175 per acre due to electricity, maintenance and additional labor. It is estimated that the irrigation will increase yields and thus operating receipts by $300 per acre. The cost for drilling a well would be $10,200 and the cost for the center pivot irrigation system would be $42,000. The irrigation system would be mile long and would irrigate 100 acres. Suppose that the farmer wants to evaluate this investment over a five-year period of time. The farmer believes that if he sold the farm in five years, the irrigation system would add $20,000 to the sale price. The farmer anticipates that his marginal tax rate over the next six years will be 20%. The IRS will allow the farmer to depreciate the investment using straight line over 15 years. Assume that the terminal value of this investment is $20,000 at the end of five years. The farmer requires a 11% return to capital (pretax).

(i) Calculate the Initial Cost

a. $31,000

b. $42,000

c. $39,200

d. $52,200

(ii) Calculate the after tax- net returns

a. $12,500

b. $10,000

c. $24,000

d. $14,000

(iii) Calculate the tax savings from depreciation

a. $696

b. $52,000

c. $3,480

d. $382

Calculate the after-tax terminal value

a. $20,000

b. $16,000

c. $4,000

d. $30,744

Which discount rate should be used for calculating the NPV of this investment?

a. 8.8% b. 11%

c. 11.6% d. 20%