Reference no: EM133150351

Question - An urban cooperative in Austin that supplies leafy greens and herbs to local restaurants and grocery stores is looking to expand their operation. The co-op would like to build an aquaponic system to increase their production of greens and also start producing tilapia. The new system would cost $39,800 to purchase and construct. The co-op projects that it will produce $420 of tilapia and $990 of leafy greens every week (real dollars). Real operating expenses are expected to increase by $38,000 annually due to fish nutrients, utilities, maintenance, and additional labor. Suppose that the workers wanted to evaluate this investment over a five-year period of time before committing. They expect that the components could be sold for $8,600 after five years of use. Taxes are expected to stay at 30% for the next six years and inflation is expected to be 1.5%. The IRS will allow the co-op to depreciate the system using straight line over 15 years. Assume that the real terminal value of this investment is $8,600 at the end of five years. The co-op requires an 14% return to capital (pretax) and has a 4% risk premium.

Required -

(i) What is the nominal pre- tax terminal value?

(a) 9,265

(b) 8,600

(c) 14,445

(d) 7,981

(ii) What is the after- tax, risk adjusted discount rate?

(a) 10.94%

(b) 10%

(c) 12.6%

(d) 13.8%

(iii) What are the real net returns in 3 years?

(A) 36,933

(B) 35,320

(C) 73,320

(D) 25,853

(iv) What are the tax savings from depreciation in year 2?

(A) 796

(B) 765

(C) 828

(D) 2,653

(V) What is the after-tax terminal value?

(A) 14,544

(B) 13,980

(C) 14,445

(D) 14,607

(vi) What is the nominal after tax net return in year 2?

(A) 36,388

(B) 25,471

(C) 35,320

(D) 24,724

(vii) What is the percent value?

(A) 62,533

(B) 67,165

(C) 63,889

(D) 67,561