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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
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 $1r'0,000. Mr. Agirich expects that the irrigation system will increase yield and thus operating receipts by $15,000 per year but it will cost $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 $50,000 at the end of 4 years. Assume that the Mr. Agirich expects that the ination rate will be 4% and that operating receipts, operating expenses, and terminal value will increase at the rate of ination (i.e., operating receipts, operating expenses and terminal value are stated as re_al dollars, thus, you must convert them to nominal dollars) . The bank has offered to lend lvlr. Agirich $150,000. The loan will be fully amortized at a 10% interest rate over six years (annual payments). Mr. Agirich anticipates that his marginal tax rate over the next four years will be 20%. The LES will allow Aggie Farms to depreciate the investment using straight-line over 10 years. Mr. Agirich requires at least a 13% pre-tax, risk-free rettu'n on capital and a 2% risk premium on projects of comparable risk to the irrigation system. A. Lay out the cash flows for the investment. B. Calculate the net present value. [NPV=-$l,323.25] C. Discuss whether or not the irrigation system is a protable investment. I}. Evaluate the nancial feasibility of this investment. Would there be a potential liquidity problem if the investment was protable\"? Explain
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