Mr Agirich of Aggie Farms is thinking about investing in a center pivot irrigation system to irrigate 1 0 0 acres of land The irrigation system costs $ 7 0 , 0 0 0 Mr Agirich expects that the irrigation system will increase yield and thus operating receipts by $ 1 5 , 0 0 0 per year but it will cost $ 4 , 0 0 0 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 $ 5 0 , 0 0 0 at the end of 4 years Assume that the Mr Agirich expects that the inflation rate will be 4 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 $ 6 0 , 0 0 0 The loan will be fully amortized at a 1 0 interest rate over six years ( annual payments ) Mr Agirich anticipates that his marginal tax rate over the next four years will be 2 0 The IRS will allow Aggie Farms to depreciate the investment using straight line over 1 0 years Mr Agirich requires at least a 1 3 pre tax, risk free return on capital and a 2 risk premium on projects of comparable risk to the irrigation system What is the annual real pre tax Net Returns in the third year ANSWER What is the annual nominal pre tax Net Returns in the third year ANSWER What is the annual nominal after tax Net Returns in the third year ANSWER What is the nominal tax savings from depreciation ANSWER What is the nominal pre tax terminal value in four years ANSWER What is the after tax nominal terminal value in four years ANSWER What is the accumulated depreciation over the four years ANSWER What is the after tax risk adjusted discount rate ANSWER What is the present value of the after tax net returns ANSWER What is the present value of tax savings from depreciation ANSWER What is the annual loan payment ANSWER What is the loan balance at the end of the third year ANSWER 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 ANSWER Financial Feasibility is not a problem ANSWER

Question

Mr   Agirich of Aggie Farms is thinking about investing in a center pivot irrigation system to irrigate 1 0 0 acres of land  The irrigation system costs $ 7 0 , 0 0 0   Mr   Agirich expects that the irrigation system will increase yield and thus operating receipts by $ 1 5 , 0 0 0 per year but it will cost $ 4 , 0 0 0 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 $ 5 0 , 0 0 0 at the end of 4 years  Assume that the Mr   Agirich expects that the inflation rate will be 4   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 $ 6 0 , 0 0 0   The loan will be fully amortized at a 1 0   interest rate over six years ( annual payments )   Mr   Agirich anticipates that his marginal tax rate over the next four years will be 2 0     The IRS will allow Aggie Farms to depreciate the investment using straight   line over 1 0 years  Mr   Agirich requires at least a 1 3   pre   tax, risk   free return on capital and a 2   risk premium on projects of comparable risk to the irrigation system  What is the annual real pre   tax Net Returns in the third year ANSWER  What is the annual nominal pre   tax Net Returns in the third year ANSWER  What is the annual nominal after   tax Net Returns in the third year ANSWER  What is the nominal tax savings from depreciation ANSWER  What is the nominal pre   tax terminal value in four years ANSWER  What is the after   tax nominal terminal value in four years ANSWER  What is the accumulated depreciation over the four years ANSWER  What is the after   tax risk adjusted discount rate ANSWER  What is the present value of the after   tax net returns ANSWER  What is the present value of tax savings from depreciation ANSWER  What is the annual loan payment ANSWER  What is the loan balance at the end of the third year ANSWER  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 ANSWER  Financial Feasibility is not a problem ANSWER

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Mr . Agirich of Aggie Farms is thinking about investing in a center pivot irrigation system to irrigate 1 0 0 acres of land. The

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