Question
Creamy Dairy is a family-owned dairy located in upstate New York. They are trying to decide how to process their corn into feed for their
Creamy Dairy is a family-owned dairy located in upstate New York. They are trying to decide how to process their corn into feed for their livestock. Because they are dairy farmers (and good ones at that), financial choices have a mystical quality about them, so they could use your help. The farm is currently earning $300,000 per year, and an improvement could provide additional revenue. Each of the options will result in an additional (above the current dairy earnings) yearly pre-tax cash flow of $100,000 for 15 years starting at time 1: Option 1: Subcontract the feed process at a cost of $75,000 per year starting at time 1. Option 2: Upgrade the current feed facilities at a cost of $200,000 for equipment and yearly maintenance cost of $25,000. Option 3: Build a new facility for $300,000 with no maintenance required for 10 years then $15,000 for the remaining useful life. Creamy Dairy uses the cost of capital of 4%. Assume no short-term debt, a market rate of 8%, risk-free rate of 2.5%, and marginal tax rate of 35%. Create an Excel model (use the blank template provided in Table 3.4), and determine the NPW/AEW of the three options.
Problem 3-11 from Engineering Economics of LCCA by Farr and Faber
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