2. You own a farm business that produces corn and soy, and you need to replace...
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2. You own a farm business that produces corn and soy, and you need to replace your combine harvester. You are choosing between two options: A John Deere combine that costs $600,000, and a New Holland which costs $450,000. The John Deere model is more efficient and you estimate that it will result in an increase in annual cash flows of $150,000 for seven years, with a salvage value of $100,000 in year seven. The New Holland combine results in cash flows of $100,000 for seven years, with a salvage value of $75,000 in year seven. a. Calculate the net present value and internal rate of return for both investments. Assume that your required-rate-of-return is 7.0%. Which is the better investment? Why? b. Suppose that you do not have equity for a down-payment but can get a loan for the full amount at an annual interest rate of 9.0%. Recalculate the net present value and internal rate of return. Should you do the loan? Why or why not? c. Assume now that interest rates have risen dramatically and you can only find a loan at an annual rate of 19%. Recalculate the net present value and internal rate of return. Should you do the loan? Why or why not? 2. You own a farm business that produces corn and soy, and you need to replace your combine harvester. You are choosing between two options: A John Deere combine that costs $600,000, and a New Holland which costs $450,000. The John Deere model is more efficient and you estimate that it will result in an increase in annual cash flows of $150,000 for seven years, with a salvage value of $100,000 in year seven. The New Holland combine results in cash flows of $100,000 for seven years, with a salvage value of $75,000 in year seven. a. Calculate the net present value and internal rate of return for both investments. Assume that your required-rate-of-return is 7.0%. Which is the better investment? Why? b. Suppose that you do not have equity for a down-payment but can get a loan for the full amount at an annual interest rate of 9.0%. Recalculate the net present value and internal rate of return. Should you do the loan? Why or why not? c. Assume now that interest rates have risen dramatically and you can only find a loan at an annual rate of 19%. Recalculate the net present value and internal rate of return. Should you do the loan? Why or why not?
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a Calculate the net present value NPV and internal rate of return IRR for both investments For John ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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