Question

QUESTION 5 John is a farmer in the midwest who currently uses fossil fuels to dry his corn crop. He currently has a high-speed, high-temperature drying system, and to reduce his fuel costs, he wishes to switch to a combination of high-temperature and low temperature drying system that allows him to use natural solar energy for part of the drying process. John will run 15,000 bushels/day for 40 days through the new drying system and estimates the solar drying will save him $0.02/bushel, therefore increasing his net returns. The initial cost of the system is $80,000, has a real terminal value of $30,000 and has an investment life of 10 years. John has a required rate of return of 10%, a marginal tax rate of 25% and the system will be depreciated using a straight-line method over 15 years. Assume an inflation rate of 2% and a risk premium of 1%. What is the after-tax, risk adjusted discount rate? a. 10% b.7.7% C.8.25% 0.7% What are the pre-tax real net returns? a.$9,000 b.$12,000 c.$6,000 d.$7,560 What is the yearly allowable depreciation using the straight-line method? a $5,000 b.$5,333.33 c.$4,000 d.54,285,71 What is the capital gain/loss? a $5,333.33 b(2,183.55) (57,333.33) d. 59.903.17 See All

Answer 1

1. Risk adjusted return = 10 %

2. Savings = $ 0.02/bushel

So, total savings in a year = 0.02 * 15000 * 40 = $ 12,000

This is the pre-tax income.

3. As per straight-line depreciation, depreciation expense each year = (80,000 / 15) = $ 5333.33

4. Terminal value after 10 years = $ 30,000

depreciation expense in 10 years = 5333.33 * 10 = $ 53,333

Salvage value at the end of 10 years = 80,000 - 53,333 = $ 26,667

Capital Gain = 30,000 - 26,667 = $ 3,333.33

5. Life of investment = 10 years

6. Accumulated depreciation after 10 years = $ 53,333

7.