Homework Questions pg 67-68

.docx

School

Southern Arkansas University *

*We aren’t endorsed by this school

Course

4043

Subject

Finance

Date

Feb 20, 2024

Type

docx

Pages

Uploaded by SarahBarkhimer

Sarah Barkhimer Ag Finance February 9, 2024 Homework Questions pg. 67-68 1. A cattle rancher had average total assets of five million dollars and average total liabilities of two million dollars during the preceding year. Her cost of debt for that year was 7.5% and she estimates her cost of equity to be 10%. What was this rancher’s weighted average cost of capital expressed as a percentage? a. K c = w d K d + w e K e b. w d = total liabilities/total assets = $2,000,000/$5,000,000 = 0.4 c. w e = total owner’s equity/total assets = $3,000,000/$5,000,000 = 0.6 i. assets = liabilities + owner’s equity ii. Owner’s equity = assets – liabilities iii. $5,000,000 - $2,00,000 = $3,000,000 d. K d = 7.5% = 0.075 e. K e = 10% = 0.1 f. K c = (0.4)(0.075) + (0.6)(0.1) = 0.03+0.06 = 0.09 = 9% 2. Calculate the payback period for a dry-bean harvester that required an initial cash outlay of $250,000. The after-tax net cash flows from this harvester will be $60,000 during the first year; $50,000 for each of the second, third, and fourth years; and $30,000 for the fifth, sixth, seventh, and eighth years. In year eight, the harvester can be sold for an after-tax salvage value of $40,000. Year Annual Net Cash Flows Running Total 1 $60,000 $60,000 2 $50,000 $110,000 3 $50,000 $160,000 4 $50,000 $210,000 5 $30,000 $240,000 6 $30,000 $270,000 7 $30,000 $300,000 8 $30,000 $330,000 a. The payback period for a dry-bean harvester will be 6 years because the money spent on the harvester will be recouped after the sixth year. 3. What is the simple rate of return on an almond hulling business you can buy for $1,500,000 that will generate a net income of $200,000 per year. a. Simple rate of return = net income /initial investment = $200,000/$1,500,000 = 0.1333 = 13.3%

Sarah Barkhimer Ag Finance February 9, 2024 4. A farm building costs $54,000 to build today and will earn after-tax net cash flows of $16,000 per year for five years. There is no salvage value on the building at the end of the five-year life, and the farmers’ cost of capital is 9%. a. What is its net present value? i. Original Investment $54,000 Cash Flow NPV Value 9% Present Value Year 1 $16,000 0.9174 14,678.40 Year 2 $16,000 0.8417 13,467.20 Year 3 $16,000 0.7722 12,355.20 Year 4 $16,000 0.7084 11,334.40 Year 5 $16,000 0.6499 10,398.40 Total 62,233.60 Less Initial Cost -54,000 NPV $8,233.60 b. What is the benefit-cost ratio of this building at a cost of capital of 9%? i. Benefit Cost Ratio = Present Value of Future Benefits/Initial Investment = (NPV + Initial Investment)/Initial Investment ii. ($8,233.60+$54,000)/$54,000 = 1.15 c. Calculate the internal rate of return on this building. Use the trial- and-error method and show all of your iterative steps. i. Since 9% gave us an NPV of $8,233.6, our first trial-and- error number will be 13%. We will plug it into the table from part A. Original Investmen t Cash Flow NPV Value 13% Present Value Original Investme nt Cash Flow NPV Value 15% Present Value Year 1 $16,000 0.885 14,160 Year 1 $16,000 0.8696 13,913.60 Year 2 $16,000 0.7831 12,529.60 Year 2 $16,000 0.7561 12,097.60

Sarah Barkhimer Ag Finance February 9, 2024 Year 3 $16,000 0.6931 11,089.60 Year 3 $16,000 0.6575 10,520 Year 4 $16,000 0.6133 9,812.80 Year 4 $16,000 0.5718 9,148.80 Year 5 $16,000 0.5428 8,684.80 Year 5 $16,000 0.4972 7,955.20 Total $56,276.8 Total 53635.2 Less Initial Cost -54,000 Less Initial Cost -54000 NPV $2,276.8 NPV -364.80 Since our NPV is way too high with 13%, but too low with 15%. We can assume the IRR will be approximately 14.5%. 5. What is the internal rate of return (to the nearest one-half percent) on an investment costing $500,000 and having expected future after-tax net cash flows of: Year Net Cash Flow ($) 1 100,000 2 150,000 3 150,000 4 300,000 (includes salvages) Use the trial-and-error method and write out all your work. Hint: start at 10%. Original Investme nt Cash Flow NPV Value 10% Present Value Original Investment Cash Flow NPV Value 12% Present Value Year 1 $100,000 0.9091 90,910 Year 1 $100,000 0.8929 89,290 Year 2 $150,000 0.8264 123,960 Year 2 $150,000 0.7972 119,580 Year 3 $150,000 0.7513 112,695 Year 3 $150,000 0.7118 106,770 Year 4 $300,000 0.683 204,900 Year 4 $300,000 0.6355 190,650 Total 532,465 Total 506,290 Less Initial Cost -500,000 Less Initial Cost -500,000 NPV 32,465 NPV 6,290 Original Investment Cash Flow NPV Value 13% Present Value Year 1 $100,000 0.885 88,500 Year 2 $150,000 0.7831 117,465

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version