ICE4_513_08 - AGEC513--Spring 2008 Dr. Hikaru Peterson

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Unformatted text preview: AGEC513--Spring 2008 Dr. Hikaru Peterson Name________________________ INCLASS EXERCISE 4 Due 8:30am, April 11 (Friday) Total 15 points This exercise is intended to provide more practices for Exam 3 scheduled in class on April 11. I recommend you work through the exercise prior to class on April 9, before Josh goes over the exercise in class. You are encouraged to study from this exercise to prepare for the exam. The completed exercise is due at the beginning of the exam to be graded. As in the exam, every answer must be accompanied by appropriate documentation of steps to receive any credit. If you're using formulas, the complete formula you evaluated to obtain your answer must be documented. If you're using a financial calculator, all inputs used to obtain your answer must be documented. 1. (9 points) An ethanol plant costs $15,500,000. You project over the next 5 years that you can sell $3,700,000/year worth of product with $280,000/year in cost. At the end of year 3 you expect to spend $1,000,000 for maintenance. After 5 years, you expect the salvage value of the plant to be $2,000,000, and you want to get out of the business at that time. a. (2 point) Calculate the payback period in years. b. (1 points) Based on your calculation in (a), should you buy the plant? Explain your answer. 2 c. (2 points) Calculate the NPV of the plant investment using a discount rate of 7%. d. (1 points) If 7% is your required rate of return, should you buy the plant? Explain your answer. e. (3 points) Calculate the NPV of the plant investment using a discount rate of 4%. Use your answer to estimate the IRR using a graph. 3 2. (6 points) Your cattle vaccination sales person is trying to sell you on a new customized parasite treatment for your feedlot that he claims will increase your average daily gain between 0.25 and 0.75 pounds/day day for the final 150 days that the cattle are on feed. This treatment will cost $45 per head. Assume your annual required rate of return is 7.5%, and you have locked in to sell your cattle for $1.15 a pound in 150 days. a. (2 points) Calculate the perhead NPV of adopting this treatment assuming it will yield a 0.25 pound increase in daily gain. b. (2 points) Calculate the perhead NPV of adopting this treatment assuming it will yield a 0.75 pound increase in daily gain. c. (2 points) Calculate the increase in daily gain needed to make the NPV of this investment zero. ...
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This note was uploaded on 04/29/2008 for the course AGEC 513 taught by Professor Peterson during the Spring '08 term at Kansas State University.

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