Suppose Mr$.$ Agirich has decided to buy a center pivot irrigation system but can't decide between buying a new or used system. Mr$.$ Agirich has determined that the NPV$($new$)=$$$4,500$ and the NPV$($used$)=$$$2,000.$ Mr$.$ Agirich wants to choose the new system because it has a higher NPV but is not sure because he has heard that NPV is not the correct criterion for investment comparisons if the investments have different economic lives. Suppose Mr$.$ Agirich learns that you have taken a financial management course at TAMU and has asked you to help him decide whether to buy the new or used irrigation system. He provides the additional information:

Mr$.$ Agirich requires at least a $15\%$ pre$-$tax rate of return on investments, the marginal tax rate is $40\%,$ the expected rate of inflation is $3\mathrm{.}8\%,$ the economic life of the new system is $15$ years and the economic life of the used system is $5$ years.

Should Mr$.$ Agirich buy the new or used irrigation system?

What is the nominal pre$-$tax discount rate?

ANSWER

What is the nominal after$-$tax discount rate?

ANSWER:

What is the real after$-$tax discount rate?