John is a farmer in the midwest who currently uses fossil fuels to dry his corn crop. He currently has a high-speed, high-temperature drying system, and to reduce his fuel costs, he wishes to switch to a combination of high-temperature and low-temperature drying system that allows him to use natural solar energy for part of the drying process. John will run 15,000 bushels/day for 40 days through the new drying system and estimates the solar drying will save him $0.01/bushel, therefore increasing his net returns. The initial cost of the system is $80,000, has a real terminal value of $30,000 and has an investment life of 9 years. John has a required rate of return of 8%, a marginal tax rate of 25% and the system will be depreciated using a straight-line method over 15 years. Assume an inflation rate of 2% and a risk premium of 1%.

What is the after-tax, risk adjusted discount rate?

a.10%

b.7.7%

c.8.25%

d.6.75%

What are the pre-tax real net returns?

a.$9,000

b.$12,000

c.$6,000

d.$7,560

What is the yearly allowable depreciation using the straight-line method?

a.$5,000

b.$5,333.33

c.$4,000

d.$4,285.71

What is the capital gain/loss?

a.$5,333.33

b.$3,852.78

c.($7,333.33)

d.$9,903.17

What is the life of the investment?

a.9 years

b.8 years

c.4 years

d.10 years

What is the accumulated depreciation after 9 years?

a.$53,333.33

b.$41,333.33

c.$48,000

d.$50,000

What is the NPV?

a.($11,848.36)

b.$10,120.58

c.($11,152.93)

d.($19,358.84)