Reference no: EM133069177

Your childhood friend is considering buying a Nebraska ranch and is seeking your financial expertise. She estimates that all of the equipment and land will have an initial cost as provided in your spreadsheet. Your friend estimates it will generate revenues the first year but will also have associated costs as shown. Both sales and costs will grow with expected inflation, the rate of which is provided to you. Your friend only wants to keep the ranch for a finite number of years, at which point it will be sold for an estimated "salvage value." Due to your advice, your friend decides to depreciate using the MACRS 7-year schedule, which uses the following factors: 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, and 4.46%. Your friend pays taxes at an appropriate rate. You recommend your friend considers net working capital (NWC) in the cash flow projections for this situation, knowing whatever is required each year will be recovered at the time she sells the ranch. Based on ranches with comparable risk, you have estimated and will use an appropriate cost of capital to analyze your friend's ranch.