Problem $6.$ A farmer is thinking about investing in a center pivot irrigation system to irrigate $120$ acres of land in Dawson County. This land is used to produce cotton and is currently a dryland operation. Current production is approximately $\frac{3}{4}$ bale of cotton per acre. The current operating expenses are $$100$ per acre. With an irrigation system, operating expenses would increase by $$125$ per acre due to electricity, maintenance and additional labor $($Total operating expense $=$$$225).$ The irrigation system will be used during periods of low precipitation for the growing of cotton and for preparing the ground for breaking. It is estimated that the irrigation will increase yields and thus operating receipts by $$200$ per acre. The cost for drilling a well would be $$9,180$ and the cost for the center pivot irrigation system would be $$33,000.$ The irrigation system would be $\frac{1}{4}$ mile long and would irrigate $120$ acres. This system would run off electricity and would be able to apply any amount of water over any giv$$n period. Suppose that the farmer wants to evaluate this investment over a five$-$year period of time. The farmer believes that if he sold the farm in five years, the irrigation system would add $$30,000$ to the sale price. The farmer anticipates that his marginal tax rate over the next six years. will be $15\%.$ The IRS will allow the farmer to depreciate the investment $($$$33,000+$$$9,180)$ using straight$-$line over $15$ years. Assume that the terminal value of this investment is $$30,000$ at the end of five years. The farmer requires a $12\%$ return to capital $($pretax$).$

What is the initial cost of the equipment?

Calculate the after$-$tax net returns per year for the next $3$ years.

Calculate the tax savings from depreciation

Calculate the after$-$tax terminal value.

Calculate the after$-$tax discount rate.

Lay out the cash flows for the investment in the table below.

Calculate the net present value.

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IRR NPV Add Row MIRR

Discount Rate $(\%)$

Note

Cash Flow $0$

Cash Flow $1$

Cash Flow $2$

Cash Flow $3$

Cash Flow $4$

Cash Flow $5$

$8.$ Indicate whether the investment is acceptable based on the NPV$.$