A rancher is considering the purchase of additional land to expand operations. He can operate an additional 1500 acres with present labor and machinery. The
A rancher is considering the purchase of additional land to expand operations. He can operate an additional 1500 acres with present labor and machinery. The land is selling for $800 per acre. This rancher believes that the operating revenue per acre of land will be $700 and operating expenses will be $500 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 $800 per acre. A bank will loan him $650 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 16% and that he requires at least an 8% pre-tax, risk-free return on capital and a 2% risk premium on projects of comparable risk.
(i) Calculate the nominal after-tax net returns at the end of year 2.
a. $159.25b. $178.23
c. $132.60d. None of the answers are correct
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