A farmer expects irrigation system will increase real operating receipts by $22,000 per year but will also increase real operating expenses by $5,000. Suppose that the inflation rate is 3% and the marginal tax rate is 15%.

(i) What is the nominal net return at the end of year 2?

a. $16,490 b. $18,035

c. $17,000 d. $19,550

(ii) Calculate the nominal after-tax net return at the end of year 5.

a. $19,708 b. $19,550

c. $18,963 d. $16,752

Given the following information :

Nominal Initial Cost = $90,500; Nominal Before-tax Net Return = $7,000

Marginal Tax Rate = 20%; Required rate of return = 11%

Real Terminal Value = $110,500; Investment Life = 5 years

Suppose that IRS will allow the investor to depreciate the investment using straight-line over 12 years and the inflation rate is 5%.

(i) What is the annual depreciation expense?

a. $7,452 b. $7,919

c. $8,100 d. $7,905

(ii) What are the tax savings from depreciation?

a. $819.72 b. $1,490.40

c. $372.60 d. $1,400.00