B. (40 pts) Fem & Leif Stoltzfus (age 27, 29) operate a nursery and retail garden shop near Starkville, MS. They are relatively new to the industry having only been in production for the past 5 years. The local economy, as well as the US economy, has been slow for those years, so the business is struggling - cash is tight. Fern & Leif are considering upgrading the old equipment and facilities they bought to start the business. They were cheap, but they are old and inefficient. But it was all that they could afford. They borrowed money from their family to get started in the business; but otherwise, neither has ever borrowed money from a lender. As a result, their credit scores are 550 for Leif and 610 for Fem. They have come up with 3 possible combinations of facilities and equipment that will work for their business. Option A: $175,000 of cutting edge facilities and $55,000 of relatively new equipment Option B: $125,000 of time-tested facilities and $75,000 of high-tech equipment Option C: $100,000 of "cut-rate" facilities and $50,000 of lightly used equipment They have estimated the net cash flows for each of these investments. Options B and Care relatively straightforward because there is lots of industry research and data on these combinations. Their net cash flows are included in the following table. Option A, on the other hand, is a crap-shoot. The only reliable data they have says that the initial net cash flow (year 1) should be $20,000. This net cash flow is expected to increase by 6% cach year all the way through year 10. For years 11-20 the net cash flow is expected to grow at only 4% annually. Fern & Leif currently have a DebtAsset ratio of 70% and an Equity/Asset ratio of 30%. The average interest rate on their liabilities (debt) is 7% and they feel the opportunity cost of their equity is 9%. A tax rate is 10%. 1. (20 pts) Calculate the before and after tax Net Present Value (NPV) and Internal Rate of Return (IRR) for each of these investment combinations. Show your work on a separate sheet. B. (40 pts) Fem & Leif Stoltzfus (age 27, 29) operate a nursery and retail garden shop near Starkville, MS. They are relatively new to the industry having only been in production for the past 5 years. The local economy, as well as the US economy, has been slow for those years, so the business is struggling - cash is tight. Fern & Leif are considering upgrading the old equipment and facilities they bought to start the business. They were cheap, but they are old and inefficient. But it was all that they could afford. They borrowed money from their family to get started in the business; but otherwise, neither has ever borrowed money from a lender. As a result, their credit scores are 550 for Leif and 610 for Fem. They have come up with 3 possible combinations of facilities and equipment that will work for their business. Option A: $175,000 of cutting edge facilities and $55,000 of relatively new equipment Option B: $125,000 of time-tested facilities and $75,000 of high-tech equipment Option C: $100,000 of "cut-rate" facilities and $50,000 of lightly used equipment They have estimated the net cash flows for each of these investments. Options B and Care relatively straightforward because there is lots of industry research and data on these combinations. Their net cash flows are included in the following table. Option A, on the other hand, is a crap-shoot. The only reliable data they have says that the initial net cash flow (year 1) should be $20,000. This net cash flow is expected to increase by 6% cach year all the way through year 10. For years 11-20 the net cash flow is expected to grow at only 4% annually. Fern & Leif currently have a DebtAsset ratio of 70% and an Equity/Asset ratio of 30%. The average interest rate on their liabilities (debt) is 7% and they feel the opportunity cost of their equity is 9%. A tax rate is 10%. 1. (20 pts) Calculate the before and after tax Net Present Value (NPV) and Internal Rate of Return (IRR) for each of these investment combinations. Show your work on a separate sheet