Question

A farmer has the opportunity to purchase an advanced guidance system for precision farming. This is the advertisement: New Outback MAX Guidance System Outback MAX™ with Outback ConnX™ — introducing the next generation Outback Guidance® system that redefines simplicity in precision farming. Outback MAX leads the way with simplicity in design and operation, a powerful mapping engine, excellent screen clarity, seamless connectivity, and a rugged design that can operate in rough environments—features that are critical to achieving the benefits of precision farming. What makes MAX the smart choice for you and your business? • Compatible with eDriveX™ with eTurns™ - taking advantage of the most precise and feature rich automated steering available. • Has excellent screen clarity and rugged design that can operate in rough environments • Provides a powerful mapping engine that stacks imagery and data layers • Delivers seamless connectivity via the Outback ConnX data management system to deliver real-time data access and management. The farmer believes that the guidance system will add the value of improved farming, more uniform treatments, less driver skill needed and extended hours of operation. He believes improved yields and reduction in operating costs will increase his profits by $1,200 per year. He plans to keep the Guidance system for 15 years. At the end of 15 years he believes he can sell it for $300.

(i) Calculate the market value of this investment if the market rate of return on comparable investments is 16% a.$7,177 b. $6,723 c. $1,802 d. $26,616 e. None of the above ENTER RESPONSE HERE:

(ii) Calculate the Net Present Value if the price of this investment is $6000 and the farmer’s required rate of return is 16% (discount rate) and state if this investment is acceptable. a. $1,177; Acceptable b. $20,616; Acceptable c. $723; Acceptable d. -$4,198; Unacceptable e. None of the above ENTER RESPONSE HERE:

(iii) Calculate the yield on this investment if the price of this investment is $6,000 and state if this investment is acceptable if the required rate of return is 16%. a. 18.5%; Acceptable b. 11.79%; Acceptable c. 18.8%; Unacceptable d. 8.20%; Unacceptable e. None of the above ENTER RESPONSE HERE:

(iv) After the farmer has used this Guidance system for 15 years, he discovers that the increase in profits was only $1,000 and the 15 year old guidance system was antiquated and he couldn’t sell it. Given he paid $6,000 for the guidance system, what was the true yield? a. 14.8% b. 14.95% c. 12.0% d. 14.5% e. None of the above

Answer 1

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