Calculate the tax savings from depreciation

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Reference no: EM131872264

A farmer is thinking about investing in a center pivot irrigation system to irrigate 80 acres of land in Fresno. The current operating expenses are $80 per acre. It is estimated that the irrigation will increase yields and thus operating receipts by $100 per acre. The cost for drilling a well would be $10,000 and the cost for the center pivot irrigation system would be $22,000. The irrigation system would be ¼ mile long and would irrigate 80 acres. Suppose that the farmer wants to evaluate this investment over a five-year period of time. The farmer believes that if he sold the farm in five years, the irrigation system would add $20,000 to the sale price. The farmer anticipates that his marginal tax rate over the next six years will be 20%. The IRS will allow the farmer to depreciate the investment using straight line over 15 years. Assume that the terminal value of this investment is $20,000 at the end of five years. The farmer requires a 12% return to capital (pretax).

(i) Calculate the initial Cost

a. $31,000

b. $42,000

c. $32,000

d. $22,000

(ii) Calculate the present value after tax-net returns

a. $12,500

b. $4,902

c. $24,000

d. $14,200

(iii) Calculate the tax savings from depreciation

a. $427

b. $696

c. $382

d. $549

Reference no: EM131872264

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