Drew owns and operates an onion packing plant. To help reduce costs on labor and to increase efficiency, Drew is considering purchasing an automatic 50 lb. bagging machine and a machine that automatically stacks the 50 lb. bags onto pallets. The cost of the two machines combined and their installation is $300,000. Drew will make a 20% down payment and finance the rest of the machinery with an amortized loan over 15 years at a 5.5% interest rate. Drew predicts that by using these two machines, his plant will be able to increase output, therefore increasing operating receipts by $30,000 per year. Also, this machinery will save him approximately $10,000 in labor costs each year by the increase in efficiency. However, other operating expenses such as electricity and insurance will increase by approximately $5,000 per year. Drew assumed a straight-line depreciation over 15 years and the life of the investment is 7 years. The real terminal value is $180,000 after the 7 years, and Drew requires a pretax 10% rate of return to capital. The marginal tax rate over the next 10 years is 20%, the rate of inflation is 2% and the risk premium is 2%.

1). What is the nominal pre-tax terminal value?

a.$180,000

b.$221,377.30

c.$206,763.42

d.$197,410.74

2). What is the after-tax, risk adjusted discount rate?

a.9.6%

b.10%

c.8.25%

d.7.45%

3). What are the tax savings from depreciation?

a.$5,000

b.$7,142.86

c.$8,333.33

d.$4,000

4). What is the after-tax terminal value?

a.$180,000

b.$197,410.74

c.$206,032.97

d.$206,763.42

5). What is the nominal after-tax net return in year 6?

a.$30,430.94

b.$35,000

c.$31,343.87

d.$31,532.55

6). What is the net present value?

a.($4,541.74)

b.$4,541.74

c.($27,791.53)

d.$27,971.53