Investment Analysis

Due Monday, December 7, 2015, answer on separate sheet of paper and attach the hand done worksheet and the two printoutsof the spread sheet calculations.

The investment question is? Should a farmer invest in and operate a 50,000 bushel grain drying and storage facility? The cost of the facility is $85,000. The economic life is about ten years. The salvage value is expected to be about $13,000. In a partial budgeting framework, one must compare the added cost per year, to the savings of eliminating the elevator charges each year.The elevator charge for drying and storage has averaged $0.55 per bushel the past few years, so the first year savings is expected to be $27,500. The farmer expects that the total elevator charge will go up about $100/yr. The operating costs of the new facility are expected to be $0.30/bu, and the repairs, insurance and taxes are expected to be an additional $800.00 a year. As the facility gets older the repair costs are expected to increase yearly as can be seen in the cost numbers below. While I have given you the costs and savings by year below, you should figure out how they were derived from the above numbers. The real interest rate is assumed to be 2%, inflation is expected to be 2% annually, and the risk factor is expected to be 3%.

SavingsCosts

1. Explain how the Year 1 and 2 savings and costs were calculated.

2. Using the Homework 9 NPV Spreadsheet on Angel right under Homework 9, go to Sheet 5 at bottom left, print off andcomplete 0-2 years by hand and turn in with HW.

3 Than using the Homework 9 NPV Spreadsheet (Sheet 4 at bottom left), do the necessary calculations to determine if the farmer should make the investment. Print off and turn in.

4 Explain why the farmer should or should not invest in the facility.

5 Would the answer change if the real interest rate is assumed to be 4%, inflation is expected to be 2% annually, and the risk factor is expected to be 3%. Why? Do a second spreadsheet.