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:

Accounts Payable

Liabilities of a business that represent its obligations to pay off short-term debts to its creditors or suppliers.

Common Stock

A form of investment indicating a share in a company's ownership, entitling the holder to a portion of its profits or losses.

Revenue

The income that a business receives from its normal business activities, typically from the sale of goods and services to customers.

Net Fixed Assets

The value of a company's property, plant, and equipment minus depreciation, representing the company's investment in long-term assets.