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 yield $420 of tilapia and $990 of leafy greens every week. 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. The IRS will allow the co-op to depreciate the system using straight line over 15 years. Assume that the terminal value of this investment is $8,600 at the end of five years. The co-op requires an 14% return to capital (pretax).
(i) Calculate the annual operating receipts
a. $35,320
b. $73,320
c. $38,000
d. $70,500
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(ii) Calculate the after tax- net returns
a. $28,625
b. $24,724
c. $28,256
d. $35,320
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(iii) Calculate the tax savings from depreciation
a. $796
b. $769
c. $531
d. $2,653
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(iv) Calculate the after-tax terminal value
a. $19,900
b. $12,187
c. $13,980
d. $8,600
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(v) Which discount rate should be used for calculating the NPV of this investment?
a. 12.8% b. 16%
c. 16.8% d. 9.8%
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(vi) What is the NPV?
a. $73,227
b. $66,197
c. $55,073
d. $65,148
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