Question

A farmer has the opportunity to purchase an advanced guidance system for precision farming. This is the advertisement:

New Outback MAX Guidance System

Outback MAX™ with Outback ConnX™ — introducing the next generation Outback Guidance® system that redefines simplicity in precision farming.

The farmer believes that the guidance system that can be purchased for $5,500 will improve corn production by 220 bushels per year. He plans to keep the Guidance system for 8 years. At the end of 8years he believes he can sell it for $1,000. The farm’s accountant has done some preliminary work. The marginal tax rate is 25%, the pre-tax risk adjusted discount rate is 8% and inflation is assumed to be zero. The account calculates the present value of the tax savings from depreciation to be $1,067.31, and the present value of the after-tax terminal value to be $470.56. The price of corn is expected to be $4.30/bushel over the 8 years.

(i)        Calculate the additional after-tax net returns from corn production if the farmer purchases the guidance system.

A.         $900

B.       $709

C.         $270

D.         $750

E.         None of these answers

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(ii)       Calculate the after-tax risk adjusted discount rate.

A. 6.0%

B.         12%

C.         3.6%

D.         1.25%

E.         None of these answers

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(iii)      Calculate the present value of the additional after-tax net returns from corn production if the farmer purchases the guidance system.

A.         $5,932

B.         $1,779

*C.       $4,406

D.         $2,963

E.         None of these answers

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(iv)      Calculate the NPV of the guidance system.

A.         $156

B.         $1100

C.         $445

D.       $444

E.         None of these answers

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(v)       Calculate the break-even improvement in corn production (yield) if the farmer purchases the guidance system.

A.         $150

B.       $198

C.         $140

D.         $170

E.         None of these answers

Enter Response Here:

Answer 1

Unit selling price	$          400.00
Less: Unit Variable cost	$        (240.00)
Unit Contribution Margin	$    160.00
Carla Vista Company'
CVP income statement
For the Month ended Sept 30,2020
	Total	Per Unit
Sales	$ 2,40,000.00	$ 400.00
Variable Costs	$ 1,44,000.00	$ 240.00
Contribution margin	$     96,000.00	$ 160.00
Fixed Costs	$     54,400.00
Net income	$     41,600.00
break even point in units : Fixed cost / Contribution margin per unit
54400 / 160	340	Units
Carla Vista Company'
CVP income statement
For the Month ended Sept 30,2020
	Total	Per Unit
Sales	$ 1,36,000.00	$ 400.00
Variable Costs	$     81,600.00	$ 240.00
Contribution margin	$     54,400.00	$ 160.00
Fixed Costs	$     54,400.00
Net income	$                   -