Question

dairy farmer has hired you to analyze the profitability of investing in robotic milkers. The dairy...

dairy farmer has hired you to analyze the profitability of investing in robotic milkers. The dairy farmer provided you with the following data. The cost of the robots and upgrading the facility would be $703,750. Repair costs would be $10,000 per year. The robots would save 1,820 hours of labor per year. Assume a labor rate of $15.00/hr. The robots are also projected to help increase milk production by 4,900 addition cwt per year. Assume a price $15 per cwt for the milk. The robots and facility can be depreciated over 7 years. The terminal value after year seven is projected to be $225,000. Assume that the inflation rate will be 2.00% and that operating revenues, operating expenses, and terminal value will increase at the rate of inflation (i.e., operating receipts, operating expenses and terminal value are stated as real dollars, thus, you must convert them to nominal dollars) .

The farmer has arranged financing with Farm Credit Services. They will lend the farmer 80% of the cost of the robots. The loan will be fully amortized at a 4.65% interest rate over 8 years (annual payments). The farmer anticipates that his marginal tax rate over the next five years will be 21%. The farmer requires at least a 5.5% pre-tax, risk-free return on capital and a 2.25% risk premium on projects of comparable investments. The life of the investment will be 7 years.


What is the NPV?


What is the IRR? Decimal form please.
This project is profitable
Group of answer choices

True

False
Is the project financially feasible?

Homework Answers

Answer #1

Calculation of Cost of Capital

Risk free return on capital 5.50%
Risk Premium 2.25%
Cost of Equity 7.75%
Component % Cost Tax WACC (% x Cost x (1-Tax))
Equity 20% 7.75% 0% 1.55%
Debt 80% 4.65% 21% 2.94%
4.49%

Calculation of Principal and Interest payment of Loan

80% of the robot cost will be financed by credit company which is 703,750 x 80% = 563,000

EMI per year = P x r(1+r)n / (1+r)n -1 = 563,000 x 4.65%(1+4.65%)8 / (1+4.65%)8 - 1 = 85,880

EMI Table

Year Interest Principal Outstanding
1           26,180        59,701        503,299
2           23,403        62,477        440,823
3           20,498        65,382        375,441
4           17,458        68,422        307,019
5           14,276        71,604        235,415
6           10,947        74,933        160,482
7             7,462        78,418           82,064
8             3,816        82,064

Interest is calculated on the outstanding principal. Principal is EMI - Interest.

Year
Particulars 0 1 2 3 4 5 6 7 8
Cost of Robots -703,750                -                  -                  -                  -                  -                  -                  -               -  
Increase in milk prodcution (4900 x 15)                -        73,500      74,970      76,469      77,999      79,559      81,150      82,773             -  
Labour Cost Saved (1,820 x 15)                -        27,300      27,846      28,403      28,971      29,550      30,141      30,744             -  
Repair Costs                -       -10,000     -10,200     -10,404     -10,612     -10,824     -11,041     -11,262             -  
Depreciation (703,750/7)                -   -100,536 -100,536 -100,536 -100,536 -100,536 -100,536 -100,536             -  
Terminal Value of Robot                -                  -                  -                  -                  -                  -                  -      253,387             -  
Interest                -       -26,180     -23,403     -20,498     -17,458     -14,276     -10,947       -7,462     -3,816
Profit before tax                -       -35,915     -31,323     -26,566     -21,636     -16,527     -11,232    247,644     -3,816
Tax @ 21%                -           7,542         6,578         5,579         4,544         3,471         2,359     -52,005          801
Profit after tax (PAT)                -       -28,373     -24,745     -20,987     -17,092     -13,057       -8,873    195,639     -3,015
Operating Cash Flow (PAT - Depn)                -        72,163      75,790      79,549      83,443      87,479      91,662    296,174     -3,015
Loan Repayment                -       -59,701     -62,477     -65,382     -68,422     -71,604     -74,933     -78,418 -82,064
Project Cash Flow -703,750      12,462      13,314      14,167      15,021      15,875      16,729    217,757 -85,079
PVF @ 4.49%      1.0000      0.9570      0.9159      0.8765      0.8389      0.8028      0.7683      0.7353    0.7037
Discounted Cash Flow -703,750      11,927      12,194      12,418      12,601      12,745      12,854    160,121 -59,872
NPV -528,762

IRR is the discount rate at which NPV becomes zero. As per below it becomes zero at negative 19.19%

Year
Particulars 0 1 2 3 4 5 6 7 8
Cost of Robots -703,750                -                  -                  -                  -                  -                  -                  -                  -  
Increase in milk prodcution (4900 x 15)                -        73,500      74,970      76,469      77,999      79,559      81,150      82,773                -  
Labour Cost Saved (1,820 x 15)                -        27,300      27,846      28,403      28,971      29,550      30,141      30,744                -  
Repair Costs                -       -10,000     -10,200     -10,404     -10,612     -10,824     -11,041     -11,262                -  
Depreciation (703,750/7)                -   -100,536 -100,536 -100,536 -100,536 -100,536 -100,536 -100,536                -  
Terminal Value of Robot                -                  -                  -                  -                  -                  -                  -      253,387                -  
Interest                -       -26,180     -23,403     -20,498     -17,458     -14,276     -10,947       -7,462       -3,816
Profit before tax                -       -35,915     -31,323     -26,566     -21,636     -16,527     -11,232    247,644       -3,816
Tax @ 21%                -           7,542         6,578         5,579         4,544         3,471         2,359     -52,005            801
Profit after tax (PAT)                -       -28,373     -24,745     -20,987     -17,092     -13,057       -8,873    195,639       -3,015
Operating Cash Flow (PAT - Depn)                -        72,163      75,790      79,549      83,443      87,479      91,662    296,174       -3,015
Loan Repayment                -       -59,701     -62,477     -65,382     -68,422     -71,604     -74,933     -78,418     -82,064
Project Cash Flow -703,750      12,462      13,314      14,167      15,021      15,875      16,729    217,757     -85,079
PVF @ -19.19%%      1.0000      1.2375      1.5313      1.8949      2.3449      2.9017      3.5907      4.4433      5.4984
Discounted Cash Flow -703,750      15,421      20,387      26,845      35,223      46,065      60,069    967,561 -467,797
NPV               25

The project is not profitable as the NPV is negative and also the IRR.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose you are a manager of a dairy farm. You are currently milking 100 cows and...
Suppose you are a manager of a dairy farm. You are currently milking 100 cows and each cow produces 22,000 pounds (220 cwt) of milk per year. To produce this quantity of milk, the farm milks the each cow twice a day (once in the morning and once in the afternoon). Now suppose milk prices are increasing. Over the past few months the price of milk has increased and milk is now selling for $15/cwt. The increase in milk price...
Suppose you are a manager of a dairy farm. You are currently milking 100 cows and...
Suppose you are a manager of a dairy farm. You are currently milking 100 cows and each cow produces 22,000 pounds (220 cwt) of milk per year. To produce this quantity of milk, the farm milks the each cow twice a day (once in the morning and once in the afternoon). Now suppose milk prices are increasing. Over the past few months the price of milk has increased and milk is now selling for $15/cwt. The increase in milk price...
Mustang Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $280,000. The...
Mustang Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $280,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the seven years. Operating revenues from the facility are expected to be $115,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 2 percent. Production costs at the end of...
Amazing Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $590,000. The...
Amazing Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $590,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value at that time. Operating revenues from the facility are expected to be $435,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 4 percent. Production costs at the end of the...
Mustang Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $277,000. The...
Mustang Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $277,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the seven years. Operating revenues from the facility are expected to be $112,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 3 percent. Production costs at the end of...
1. You and a partner are considering the purchase of a convenience store. The store has...
1. You and a partner are considering the purchase of a convenience store. The store has weekly sales of $92,700 and is paying weekly payroll of $4,500. The cost of goods sold every week is $78,000. The firm has miscellaneous expenses (taxes, insurance, garbage, electricity, natural gas, security, maintenance, property taxes, training, advertising, accounting fees, bank charges, etc.) of roughly $3,000 per week. What are the annual sales for the conenience store? 2. Assume the following cash flows for a...
Mustang Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $277,000. The...
Mustang Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $277,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the seven years. Operating revenues from the facility are expected to be $112,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 3 percent. Production costs at the end of...
Company B considers investing in a machine that costs €120,000. The machine is expected to produce...
Company B considers investing in a machine that costs €120,000. The machine is expected to produce revenues of €100,000 per year. The cost of materials and labor needed to generate these revenues will total €25,000 per year and other cash expenses will be €25,000 per year, for the next five years. The machine will be depreciated on a straight-line basis over five years with a zero salvage value and is estimated to be sold for €20,000 Euros at the end...
Copy-Cat, Inc. has signed a deal to make vintage Nissan? 240-Z sports cars for the next...
Copy-Cat, Inc. has signed a deal to make vintage Nissan? 240-Z sports cars for the next three years. The company will build the cars in Japan and ship them to the United States for sale. The current indirect rate is yen ¥113.1113 per dollar. Just before? Copy-Cat starts the? project, the Japanese and U.S. governments announce new anticipated inflation numbers. The anticipated inflation rate for parts and labor in Japan is 2.7?% over the next three? years, and the anticipated...
Question No. 2: a) Imagine you have been hired by Enormous Oil, Inc (EOI). They ask...
Question No. 2: a) Imagine you have been hired by Enormous Oil, Inc (EOI). They ask you to evaluate a project. After getting estimates from the engineers you determine that the project will have an initial capital cost of $10 million to implement and yield 100,000 barrels of oil per year. Based on this information ALONE do you have enough information to recommend investing in the project. If not, please describe the information that you lack regarding the viability of...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT