Tuesday, December 7, 2015 Answer On Separate Sheet Of Paper

Duemondaydecember7 2015 Answer On Separate Sheet Of Paper And Attac

Due Monday , Dec e mber 7 , 201 5 , answer on separate sheet of paper and attach the hand done worksheet and the two printouts of 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 $ 8 5 ,000 . The economic life is about ten years. The salvage value is expected to be about $ 13 , 00 0 . 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 , 5 00 . The farmer expects that the total elevator charge will go up about $100 /year. 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 %. Explain how the Year 1 and 2 savings and costs were calculated. Using the Homework 9 NPV Spreadsheet on Angel right under Homework 9 , go to Sheet 5 at bottom left , print off and complete 0- 2 years by hand and turn in with HW. Then 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. Ask why the farmer should or should not invest in the facility. 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.

Paper For Above instruction

Investing in agricultural infrastructure, such as a grain drying and storage facility, presents a critical decision for farmers balancing costs, savings, and financial risk. The scenario involves a farmer contemplating the purchase and operation of a 50,000-bushel grain drying and storage facility with an initial cost of $85,000, an estimated useful life of ten years, and a salvage value of $13,000. This decision hinges on an analysis of the associated costs and savings over the asset's lifetime, considering economic factors such as interest rates, inflation, and risk.

Understanding the project's financial viability requires a partial budgeting framework, which compares the annual costs of operating the new facility against the savings generated from reduced elevator charges. Historically, elevator charges for drying and storage have averaged $0.55 per bushel. For a 50,000-bushel capacity, this results in initial annual savings of $27,500. Furthermore, there is an expectation that elevator charges will increase by approximately $100 annually, adding to the ongoing costs that must be factored into the analysis.

The operating costs of the facility include a variable component of $0.30 per bushel, which amounts to $15,000 annually for 50,000 bushels, and fixed costs related to repairs, insurance, and taxes, estimated at $800 per year initially. Repair costs are projected to escalate each year as the facility ages, thus increasing the total yearly expenses. To evaluate whether the investment makes economic sense, it is essential to derive the first two years' savings and costs from these parameters, then perform a net present value (NPV) analysis using appropriate discount rates, adjusting for inflation and risk factors.

For the initial year, savings originate primarily from the avoided elevator charges, totaling $27,500, minus any increases in elevator charges ($100), resulting in approximately $27,400. Operating costs in Year 1 involve variable costs of $15,000, fixed costs of $800, and possibly increased repair and other maintenance expenses based on the facility's age. The combined costs are subtracted from the savings to determine the net benefit for Year 1. Similarly, Year 2 calculations incorporate the projected escalation in operating and repair costs ($0.30 per bushel increases, rising repair and fixed costs) and the year-over-year increase in elevator charges, refining the net savings for that period.

Using the NPV spreadsheet, the project’s cash flows are discounted at the relevant interest rate—initially at 2% considering inflation and risk—to evaluate the present value of costs and savings over ten years. If the NPV is positive, the investment is financially justifiable; otherwise, it may be inadvisable. Adjustments to the discount rate, such as increasing it to 4%, reflect changes in macroeconomic conditions, influencing the investment's attractiveness because the higher rate diminishes the present value of future benefits, possibly reversing initial favorable conclusions.

The decision to invest depends not only on the numerical analysis but also on broader risk considerations, expected facility lifespan, and market conditions. A positive NPV suggests the farmer’s savings outweigh costs, justifying the investment. Conversely, a negative NPV indicates that costs, when discounted, exceed the benefits, making the project financially unviable. Changes in economic assumptions, particularly interest rates, significantly impact the analysis because they alter the discounting process's valuation, potentially reversing the investment decision.

References

• Gittinger, J. P. (2004). Economics of Agricultural Development. Johns Hopkins University Press.
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