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Due Monday, December 7, 2015, answer on separate sheet of paper and attach the hand done worksheet and the two printoutsof the spread sheet calculations.

 

The investment question is? Should a farmer invest in and operate a 50,000 bushel grain drying and storage facility? The cost of the facility is $85,000. The economic life is about ten years. The salvage value is expected to be about $13,000. In a partial budgeting framework, one must compare the added cost per year, to the savings of eliminating the elevator charges each year.The elevator charge for drying and storage has averaged $0.55 per bushel the past few years, so the first year savings is expected to be $27,500. The farmer expects that the total elevator charge will go up about $100/yr. The operating costs of the new facility are expected to be $0.30/bu, and the repairs, insurance and taxes are expected to be an additional $800.00 a year. As the facility gets older the repair costs are expected to increase yearly as can be seen in the cost numbers below. While I have given you the costs and savings by year below, you should figure out how they were derived from the above numbers. The real interest rate is assumed to be 2%, inflation is expected to be 2% annually, and the risk factor is expected to be 3%.

 

SavingsCosts

     

Year 1

27500

15800

Year 2

27600

15850

Year 3

27700

15900

Year 4

27800

15950

Year 5

27900

16000

Year 6

28000

16050

Year 7

28100

16100

Year 8

28200

16150

Year 9

28300

16200

Year 10

28400

16250

     

1. Explain how the Year 1 and 2 savings and costs were calculated.

2. Using the Homework 9 NPV Spreadsheet on Angel right under Homework 9, go to Sheet 5 at bottom left, print off andcomplete 0-2 years by hand and turn in with HW.

3 Than using the Homework 9 NPV Spreadsheet (Sheet 4 at bottom left), do the necessary calculations to determine if the farmer should make the investment. Print off and turn in.

4 Explain why the farmer should or should not invest in the facility.

5 Would the answer change if the real interest rate is assumed to be 4%, inflation is expected to be 2% annually, and the risk factor is expected to be 3%. Why? Do a second spreadsheet.

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