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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