A rancher is considering the purchase of additional land to expand operations. He can operate an additional 750 acres with present labor and machinery. The land is selling for $650 per acre. This rancher believes that the operating revenue per acre of land will be $550 and operating expenses will be $400 in present dollars. He expects the inflation rate will be 3%. The rancher will sell the land in 3 years and he anticipates that land prices will increase at the rate of inflation from the base of $650 per acre. A bank will loan him $500 per acre of land and the loan will be fully amortized over 15 years at 12% (annual payments). The outstanding balance of the loan will be paid at the end of the third year. Assume that the marginal tax rate is 13% and that he requires at least a 8% pre-tax, risk-free return on capital and a 2% risk premium on projects of comparable risk. Calculate the nominal after-tax net returns at the end of year 2. a. $126.33 b. $138.45 c. $117.05 d. None of the answers are correct What is the present value of the nominal after tax net return after 3 years? a. $382.61 b. $368.92 c. $351.86 d. None of the answers are correct (iii) What is present value of the after-tax terminal value after 3 years? a. $532.07 b. $572.29 c. $546.91 d. None of the answers are correct What is the net present value? a. $248.77 c. $264.08 b. $251.69 d. None of the answers are correct
A rancher is considering the purchase of additional land to expand operations. He can operate an additional 750 acres with present labor and machinery. The land is selling for $650 per acre. This rancher believes that the operating revenue per acre of land will be $550 and operating expenses will be $400 in present dollars. He expects the inflation rate will be 3%. The rancher will sell the land in 3 years and he anticipates that land prices will increase at the rate of inflation from the base of $650 per acre. A bank will loan him $500 per acre of land and the loan will be fully amortized over 15 years at 12% (annual payments). The outstanding balance of the loan will be paid at the end of the third year. Assume that the marginal tax rate is 13% and that he requires at least a 8% pre-tax, risk-free return on capital and a 2% risk premium on projects of comparable risk. Calculate the nominal after-tax net returns at the end of year 2. a. $126.33 b. $138.45 c. $117.05 d. None of the answers are correct What is the present value of the nominal after tax net return after 3 years? a. $382.61 b. $368.92 c. $351.86 d. None of the answers are correct (iii) What is present value of the after-tax terminal value after 3 years? a. $532.07 b. $572.29 c. $546.91 d. None of the answers are correct What is the net present value? a. $248.77 c. $264.08 b. $251.69 d. None of the answers are correct
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
D.30.
Transcribed Image Text:A rancher is considering the purchase of additional land to expand operations. He can operate an additional 750 acres
with present labor and machinery. The land is selling for $650 per acre. This rancher believes that the operating revenue
per acre of land will be $550 and operating expenses will be $400 in present dollars. He expects the inflation rate will be
3%. The rancher will sell the land in 3 years and he anticipates that land prices will increase at the rate of inflation from the
base of $650 per acre. A bank will loan him $500 per acre of land and the loan will be fully amortized over 15 years at 12%
(annual payments). The outstanding balance of the loan will be paid at the end of the third year. Assume that the marginal
tax rate is 13% and that he requires at least a 8% pre-tax, risk-free return on capital and a 2% risk premium on projects of
comparable risk.
Calculate the nominal after-tax net returns at the end of year 2.
a. $126.33
b. $138.45
c. $117.05
d. None of the answers are correct
What is the present value of the nominal after tax net return after 3 years?
a. $382.61
b. $368.92
c. $351.86
d. None of the answers are correct
(iii) What is present value of the after-tax terminal value after 3 years?
a. $532.07
b. $572.29
c. $546.91
d. None of the answers are correct
What is the present value?
a. $248.77
c. $264.08
b. $251.69
d. None of the answers are correct
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