Transcribed Image Text
A farmer is thinking about investing in a center pivotirrigation system to irrigate 80 acres of land in Fresno. With anirrigation system, operating expenses would increase by $75 peracre due to electricity, maintenance and additional labor. It isestimated that the irrigation will increase yields and thisoperating receipts by $150 per acre. The cost of drilling a wellwould be $8,200 and the cost for the center pivot irrigation systemwould be $31,000. The irrigation system would be ¼ mile long andwould irrigate 80 acres. Suppose that the farmer wants to evaluatethis investment over a five-year period of time. The farmerbelieves that if he sold the farm in five years, the irrigationsystem would add $31,000 to the sale price. The farmer anticipatesthat his marginal tax rate over the next six years will be 15%. TheIRS will allow the farmer to depreciate the investment usingstraight line over 15 years. Assume that the terminal value of thisinvestment is $31,000 at the end of five years. The farmer requiresa 10% return to capital (pretax). Calculate the initial cost Calculate the after-tax net returns Calculate the tax savings from depreciation Calculate the after-tax terminal valueSuppose the discount rate is 8.5%. Using information from youanswers above, what is the NPV for the investment?