Mr$.$ Agirich of Aggie Farms is thinking about investing in a center pivot irrigation system to irrigate $100$ acres of land. The irrigation system costs $\backslash (\backslash$$ $70,000\backslash ).$ Mr$.$ Agirich expects that the irrigation system will increase yield and thus operating receipts by $\backslash (\backslash$$ $15,000\backslash )$ per year but it will cost $\backslash$$$4,000$ a year to pay for electricity, maintenance, and additional labor. Mr$.$ Agirich plans on keeping the irrigation system for $4$ years before replacing it with a new one and he thinks he can sell it for $\backslash$$$50,000$ at the end of $4$ years. Assume that the Mr$.$ Agirich expects that the inflation rate will be $\backslash (4\backslash \%\backslash )$ and that operating receipts, 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 bank has offered to lend Mr$.$ Agirich $\backslash (\backslash$$ $60,000\backslash ).$ The loan will be fully amortized at a $\backslash (10\backslash \%\backslash )$ interest rate over six years $($annual payments$).$ Mr$.$ Agirich anticipates that his marginal tax rate over the next four years will be $20\backslash \%.$ The IRS will allow Aggie Farms to depreciate the investment using straight$-$line over $10$ years. Mr$.$ Agirich requires at least a $\backslash (13\backslash \%\backslash )$ pre$-$tax, risk$-$free return on capital and a $\backslash (2\backslash \%\backslash )$ risk premium on projects of comparable risk to the irrigation system.

What is the annual real pre$-$tax Net Returns in the third year?

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What is the annual nominal pre$-$tax Net Returns in the third year? What is the annual nominal after$-$tax Net Returns in the third year?

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What is the nominal tax savings from depreciation?

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What is the nominal pre$-$tax terminal value in four years?

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What is the after$-$tax nominal terminal value in four years?

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What is the accumulated depreciation over the four years?

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What is the after$-$tax risk adjusted discount rate? What is the present value of the after$-$tax net returns?

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What is the present value of tax savings from depreciation?

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What is the annual loan payment?

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What is the loan balance at the end of the third year?

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What is the tax savings from interest payments in the fourth year?

ANSWER: What is the Net Cash Flow after debt flows at the end of the second year?

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Financial Feasibility is not a problem?

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