Mrs. Jones has decided to buy a mechanical post digger but can't decide between buying a new or used digger. She has determined that the NPV (new) is $500 and the NPV 9used) is $300. Mrs. Jones wants to choose the new digger because it has a higher NPV but is not sure because she has heard that NPV is not the correct criterion for investment comparisons if the investments have different economic lives. Suppose Mrs. Jones knows that you have taken an Ag Finance course and has asked you to help her decide whether to buy the new or used post hole digger.

She has additional information: Requires at least a 10% pre-tax rate of return on investments, marginal tax rate is 30%, the expected rate of return is 2%, the economic life of the new digger is 20 years and the economic life of the used digger is 15 years. (show hand work.)

1. calculate the after-tax nominal discount rate.

2. calculate the after-tax real discount rate.

3. calculate the real annuity equivalent for the new mechanical digger.

4. calculate the real annuity equivalent for the old mechanical digger.

5. Which digger should she buy? why?