A farmer is thinking about investing in a center pivot irrigation system to irrigate 80 acres of land in Fresno. With an irrigation system, operating expenses would increase by $80 per acre due to electricity, maintenance and additional labor. It is estimated that the irrigation will increase yields and this operating receipts by $100 per acre. The cost of drilling a well would be $10,000 and the cost for the center pivot irrigation system would be $22,000. The irrigation system would be mile long and would irrigate 80 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 12% return to capital (pretax).

Calculate initial cost

Calculate the present value after tax-net returns

Calculate the tax savings from depreciation

Calculate the after-tax terminal value

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

What is the break-even price of operating receipt?