Question

A soybean farmer in the Delta is considering investing in drones to better monitor her crops on her 300-acre operation. Drone deployment will help the farmer spot disease or pests infecting her rice. The estimated increased yield/acre from the drones is 25 bu/acre. The price per bushel is $6.45. The initial purchase of each drone is $1,500 and it will require 3 drones. Additional batteries cost $150 each, so she will get an extra battery for each drone. Also, in order to properly operate the drones, she will take a training course, which costs $300. She will finance the purchase for 12 months with 3% interest. These drones should be operational for 3 years, but will not hold a terminal value. The farmer anticipates the marginal tax rate to be 20% over the lifespan of the equipment. The farmer requires a 14% return to capital rate (pre-tax) and the investment will depreciate using straight line over 5 years.

(i) Calculate the Initial Cost

(ii) Calculate the revenue of the operation after drone deployment

(iii) Calculate the after-tax net returns

(iv) Calculate the tax savings from depreciation

Answer 1

Solving first four subquestions as per Chegg's guidelines:

i)Calculation of initial cost:

Initial Cost=Purchase price of drone+Cost of batteries+Training

=($1500*3)+($150*3)+$300

=$5,250

ii)Revenue of the operation after drone deployment is;

=[Increased yield per acre*Total acre]*Price per bushel

=(25 bu*300)*$6.45

=$48,375

iii)Calcuation of after tax return:

After tax return=(Revenue-Depreciation-Interest)(1-tax rate)

Annual depreciation=[Purchase price of drone+Purchase price of batteries]/5

=[($1500*3)+($150*3)]/5

=$990

Interest=Amount borrowed for purchase*3%

=($1500*3)*3%

=$135

After tax return=($48,375-$990-$135)(1-0.20)

=$9,450

iv)Calculation the tax savings from depreciation

Annual Tax saving from depreciation=Annual depreciation*Tax rate

=$990*20%

=$198

Total tax saving from depreciatipn=$198*5=$990