1. 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 $0.015/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 8 years. To pay for the system, he will take out a loan to cover 90% of the cost of the system and pay for the remaining 10% out-of-pocket. The loan is fully amortized over 20 years with a 6.75% interest rate. John has a required rate of return of 10%, a marginal tax rate of 30% 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 nominal pre-tax net return in year 3?

   a.$9,000

   b.$6,685.61

   c.$9,741.89

   d.$9,550.87

   What is the yearly loan payment?

   a.$9,000

   b.$5,333.33

   c.$6,664.80

   d.$4,285.71

   What are the tax savings from interest in year 1?

   a.$4,860

   b.$1,382.44

   c.$1,600

   d.$1,458

   What is the principal payment in year 1?

   a.$1,804.80

   b.$72,000

   c.$6,684.8

   d.$2,343.7

   What is the Net Cash Flow after-debt in year 1?

   a.($8,000)

   b.$8,026

   c.$3,003.25

   d. $2,819.20