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 $36,000 to purchase and construct. The co-op projects that it will produce $270 of tilapia and $700 of leafy greens every week (real dollars). Real operating expenses are expected to increase by $28,000 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 $7,400 after five years of use. Taxes are expected to stay at 20% for the next six years and inflation is expected to be 2%. 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 $7,400 at the end of five years. The co-op requires an 11% return to capital (pretax) and has a 5% risk premium.

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

Answer rating: 100% (QA)

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