Question
A rancher is considering the purchase of additional land to expand operations. He can operate an additional 500 acres with present labor and machinery. The
A rancher is considering the purchase of additional land to expand operations. He can operate an additional 500 acres with present labor and machinery. The land is selling for $600 per acre. This rancher believes that the operating revenue per acre of land will be $500 and operating expenses will be $400 in present dollars. He expects the inflation rate will be 4%. 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 $600 per acre. A bank will loan him $450 per acre of land and the loan will be fully amortized over 15 years at 10% (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 15% 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.
(i) Calculate the nominal after-tax net returns at the end of year 2.
a. $86.35 b. $105.74
c. $91.94 d. None of the answers are correct
(ii) What is the present value of the nominal after tax net return after 3 years?
a. $234.43 b. $256.89
c. $215.25 d. None of the answers are correct
(iii) What is present value of the after-tax terminal value after 3 years?
a. $504.67 b. $519.60
c. $511.74 d. None of the answers are correct
(iv) What is the net present value?
a. $172.83 b. $127.32
c. $154.03 d. None of the answers are correct
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