After a Long Drought, the Manager of Long Branch Farm

question 37

Multiple Choice

After a long drought, the manager of Long Branch Farm is considering the installation of an irrigation system which will cost $100,000. It is estimated that the irrigation system will increase revenues by $20,500 annually, although operating expenses other than depreciation will also increase by $5,000. The system will be depreciated using MACRS over its depreciable life (5 years) to a zero salvage value. If the tax rate on ordinary income is 40 percent, what is the project's IRR?

• A) 12.6%
• B) -1.3%
• C) 13.0%
• D) 10.2%
• E) -4.8%

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Definitions:

Working Capital Decision

Decisions that relate to managing the short-term assets and liabilities of a company, crucial for maintaining its operations and liquidity.

Capital Budgeting

The process used by companies to evaluate and select long-term investments that are likely to help achieve their financial goals.

Investment

Designating financial means with the prospect of attaining profit or income.

Capital Intensity Ratio

A financial metric that compares a company's total assets to its sales revenue, used to evaluate how much capital is needed to generate sales.