A large hay operation in Southern Utah has hired you to analyze the profitability of investing in a hay steamer. They operate 3,500 acres of hay and get 4 cuttings per year. The cost of the steamer is $310,000. The company selling the steamer claims that operating revenues will increase by $135,000 per year with the steamer and operating expenses will increase by $42,000 per year. The steamer can be depreciated over 7 years. The terminal value after year four is projected to be $55,000. Assume that the inflation rate will be 2.25% and that operating revenues, operating expenses, and terminal value will increase at the rate of inflation (i.e.,operating receipts, operating expenses and terminal value are stated as real dollars, thus, you must convert them to nominal dollars) .

The farmer has arranged financing with State Bank of Southern Utah. They will lend the farmer 75% of the steamer cost. The loan will be fully amortized at a 5.25% interest rate over 4 years (annual payments). The farmer anticipates that his marginal tax rate over the next four years will be 21%. The farmer requires at least a 6.50% pre-tax, risk-free return on capital and a 2.75% risk premium on projects of comparable investments. The life of the investment will be 5 years.

What is the IRR?

Is the project profitable?

Is the project financially feasible?