AREC 323 Assignment 3.

NPV and IRR Daisy Medhora - 1446476

It is highly recommended to do your calculations in Excel.

Urban Farm is a peri-urban agriculture garden located 10kms northeast from the heart of
Saskatoon, SK, on the corner of Highway 41 and Township Road 372. Urban Farm allows the
opportunity for people of Saskatoon to rent a garden plot, and provide space to grow their own
fresh and organic vegetables.
Due to the increased popularity of condos and townhouses with compacted backyards in high
density cities, the demand for locally grown produce, and healthy food choices can be met by
incorporating urban agriculture outside city limits. People have become more aware of where their
food is coming from and have health conscious. Urban Farm will be able to meet this demand in
the fast growing city of Saskatoon SK.
Urban Farm’s cost and revenue information are as follows:

Revenues:
- Urban Farm has a competitive price of plot rentals being $300 per year for the first year
and will increase $10 every years after the first year. The quantity of plots available for
rental will begin with 400 plots.
Capital costs (in year 0):
- Class 6: Building, fencing, greenhouse etc.: 20000
- Class 8: Equipment without motors (trailer, lawn mower, drip irrigation): 5000
- Class 10: Machinery with motors (used garden tractor, gator, truck): 30000
Other Costs:
- The total cost to employ the manager and seasonal employees including benefits will be
$50,000 per year.
- Marketing and operating expenses including fuel, internet, insurance, utilities,
advertisement, etc. add up to $5000 a year.
Salvage value:
- You can assume a salvage value of the capital assets is equal to the total of the ending
balances of the three CCA categories in year 5.

1. Calculate the net revenue for first 5 years (5 points).

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AREC 323 Assignment 3. NPV and IRR Daisy Medhora - 1446476

Net revenue for years

Year 1: 65000, 2: 69000, 3:73000, 4:77000, 5:81000

2. Calculate the amount of CCA expenses for the first 5 years (10 points):

CCA expenses for years

Year 1: 6000, 2: 10450, 3: 7785, 4: 5864, 5: 4470

3. Calculate taxable income for first 5 years (5 points):

Taxable income for the years:

Year 1: 59000, 2: 58550, 3: 65215, 4: 71137, 5: 76530

4. Given the corporate tax rate of 13%, how much tax does Urban Farms have to pay in
years 1 to 5 (5 points)?

Urban Farms will have to pay $ taxes in years:

Year 1: 7670, 2: 7612, 3: 8478, 4: 9248, 5: 9949

5. What’s Urban Farms Net Income After Tax in years 1 to (5 points)?

Urban Farms Net Income After Tax in years:

Year 1: 51330, 2: 50939, 3: 56737, 4: 61889, 5: 66581

6. Calculate Urban Farms Net Cash Flow for years 1 to 5 (5 points):

Urban Farms Net Cash Flow in years:

Year 1: 57330, 2: 61389, 3: 64522, 4: 67752, 5: 71051

Year 1 2 3 4 5
Revenue 120000 124000 128000 132000 136000

Cost 55000 55000 55000 55000 55000

Net Revenue 65000 69000 73000 77000 81000

CCA 6000 10450 7785 5864 4470
Taxable Income 59000 58550 65215 71137 76530
Tax 7670 7612 8478 9248 9949
Net Income After Tax 51330 50939 56737 61889 66581
Net Cash Flow 57330 61389 64522 67752 71051

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 CCA calculations
Year 1 2 3 4 5
Class 6 (10%)
AREC 323 Assignment 3. NPV and IRR Daisy Medhora - 1446476
Beginning Balance - 19000 17100 15390 13851
Additions 20000
CCA 1000 1900 1710 1539 1385
Ending Balance 19000 17100 15390 13851 12466
Class 8 (20%)
Beginning Balance - 4500 3600 2880 2304
Additions 5000
CCA 500 900 720 576 461
Ending Balance 4500 3600 2880 2304 1843
Class 10 (30%)
Beginning Balance - 25500 17850 12495 8747
Additions 30000
CCA 4500 7650 5355 3749 2624
Ending Balance 25500 17850 12495 8747 6123
Total CCA 6000 10450 7785 5864 4470

7. Please calculate the NPV of (the net cash flow) of the business assuming a 20%
discounting rate. Remember, you need to include year 0 in your calculations (20 points).

Year 0 1 2 3 4 5 Sum

Net Cash Flow -55000 57,330 61,389 64,522 67,752 71,051 267,044

Discounting
1 1.1 1.21 1.331 1.464 1.611 -
factor

Discounted
-55000 52118 50734 48476 46279 44104 186711
value

Benefits Costs NPV

Salvage NPV of
Revenue Cost CCA Tax (Positive (Negative of
value Benefits
Cash Flows) Cash Flow) Costs
YEAR
-
0* 55000 0 -55000 0 -55000
1 120000 55000 6000 7670 4470 126000 62670 105000 52225
2 124000 55000 10450 7612 134450 62612 93368 43480
128000 55000 7785 8478 135785 63478 78579 36735
4 132000 55000 5864 9248 137864 64248 66485 30984

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 AREC 323 Assignment 3. NPV and IRR Daisy Medhora - 1446476

5 136000 55000 4470 9949 140470 64949 56452 26102

Sum 144940 64949 399884 134525
B/C 3
8. Please calculate the benefit to cost ratio (B/C). Remember, you need to include year 0 in
your calculations (20 points).

9. Use Excel to calculate the IRR of the business assuming a 20% discounting rate.
Remember, you need to include year 0 in your calculations (10 points).

Net
Cash
YEAR Flow

0 -55000

1 57,330

2 61,389

3 64,522

4 67,752

5 71,051

IRR 107%

10. Interpret the results of parts 7, 8, and 9 (e.g. is B/C larger or than 1? What does this
imply? Is NPV positive? What does that imply?). Based on your results and
interpretation, do you think Urban Farms is economically feasible (15 points)?

B/C is greater than 1 implying that Urban Farms is economically feasible since benefits
are larger than costs. NPV is positive meaning that investing in Urban Farms has been
worthwhile and makes sense financially. The IRR is 107% meaning that Urban Farms is
profiting since their interest rate (20%) is below the rate of return. Therefore, because
Urban Farms profits over the years it is economically feasible

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AREC 323 Assignment 3. NPV and IRR Daisy Medhora - 1446476

11. (Bonus) What do you think would happen to your answers to parts g, h, and i, if we
calculate them for a 10 year period rather than a 5 year period. Assume most of the
capital assets will work for 10 years and therefore no investment is required until the end
of year 10 (5 points).

If we were calculating for a longer period of time the answer to part g (benefits), h (costs)
and I (NPV of benefits) would be roughly around the same if factors such as economy,
environment and in the business are running at the same conditions.