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# Capital Investment Decisions: New combine as an investment

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A farmer near Bloomington owns a combine and uses it ti provide harvesting service to other farmers. He receives revenue of \$40,000 a year, plus the avoidance of \$2,000 in fees he would have to pay someone else to harvest his wheat if he did not own the machine. Fuel and repairs are \$10,000 a year and the farmer does not have another profitable use for the time he spends harvesting wheat. Unfortunately, the existing combine is worn out and fully DEPRECIATED. It can be sold for its \$1,000 spare parts value, but a dealer will allow \$5,000 as a trade in allowance on a new \$100,000 combine. The new combine will last for a estimated 10 years , after which it will have a negligible salvage value. The farmer is in a 28percent tax bracket and requires 10 percent after tax return on investments. IS THE NEW COMBINE AN ATTRACTIVE INVESTMENT? (assume January 1 installation)

#### Solution Preview

Please find the attached file. Look for the formulas in excel cells to understand how is goes.
See the attached file for complete solution. The text here may not be copied exactly as some of the symbols / tables may not print. Thanks

"A farmer near Bloomington owns a compibe and uses it it provide harvesting service to other farmers. he receives revenue of \$40,000 a year, plus the avoidance of \$2,000 in fees he would have to pay someone else to harvest his wheat if he did not own the machine. fuel and repairs are \$10,000 a year and the farmer does not have another profitable use for the time he spends harvesting wheat. unfortunately, the existing combine is worn out and fully ...

#### Solution Summary

A comprehensive problem on capital investment. The solutions include complete spreadsheet. The students can learn how to find relevant data from the problem to build financial models in Excel for decision-making.

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