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Explain why the farmer should or should not invest in the


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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Accounting Basics: Explain why the farmer should or should not invest in the
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The solution relates to NPV calculation for farmer's investment in and operating a 50,000 bushel grain drying and storage facility. The solution contains 5 parts. Part 2 and 3 is in relation to the print-out of the calculations made for part 1 and NPV. Part 4 provides that being positive NPV the investment should be made. In part due to change in discount rate the NPV is negative and the decision has changed to no.

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Anonymous user

4/21/2016 2:51:01 AM

For the facts and figures relating to saving costs illustrated in the question above; respond the question that ‘Should a farmer invest in and manage a 50,000 bushel grain drying and storage facility’? Q1. Describe how the Year 1 and 2 savings and costs were computed. Q2. By using the Spreadsheet on Angel, go to Sheet and complete 0-2 years by hand and turn in. Q3. Do the required computations to find out if the farmer should make the investment. Q4. Describe why the farmer should or shouldn’t invest in the facility. Q5. Would the answer vary if the real interest rate is supposed to be 4%, inflation is expected to be 2% yearly, and the risk factor is supposed to be 3%. Illustrate why? Do a second spreadsheet.