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What is the real discount rate

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Chad is a dairy farmer in northern Texas. His current milking system is too old and needs replaced. He has two options to replace his system. One option is to purchase a new, fully robotic milking system to lower his costs and weather potentially low milk prices in the future. This new system is designed to lower labor costs, increase production, and be more resource/energy efficient. The other option is to purchase a partially automated system. This system will not change labor costs or reduce loss, but is less expensive. After mapping out the costs and benefits, the fully robotic system has a NPV of $75,888.34 over 8 years. The partially automatic system has a NPV of $63,443.33 over 5 years. The required rate of return is 10%, the inflation rate is 2%, the risk premium is 2% and the marginal tax rate is 26%.

What is the Real Discount Rate?

a.10.02%
b.5.29%
c.8.02%
d.6.75%

What is the annuity equivalent for the fully robotic system?

a.$12,583.60
b.$7,023.72
c.$12,793.54
d.$8,707.28

What is the annuity equivalent for the partially automated system?

a.$11,229.38
b.$15,367.78
c.$7,517.62
d.$12,617.26

If Chad makes his decision based on the Annuity Equivalents, which milking machine should he buy?

a.fully robotic
b.partially automated
c.Indifferent between the two

Reference no: EM133063677

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