suppose that Mr. Agirich of Agirich Farms considers leasing a tractor instead of purchasing it. The leased tractor is the same as the tractor that would be purchased and must be operated and maintained the same. Mr. Agirich requires at least a 12% pre-tax return on capital on this type of investments. Assume that Mr. Agirich expects inflation to be 3% and his marginal tax rate to be 30%. Mr. Agririch can buy the tractor for $45,000 and sell it for $35,000 in three years (nominal dollars; do not need to adjust for inflation). The tractor can be depreciated for tax purposes over seven years.

A Calculate the after-tax discount rate for this investment comparison (ignore risk).

a. 12% b. 5.4%

c. 8.4% d. None of the answers are correct

Enter Response Here:

B Calculate the real after-tax discount rate for this investment comparison (ignore risk).

a. 12% b. 5.4%

c. 8.4% d. None of the answers are correct

Enter Response Here:

C Calculate annual Depreciation for tax purposes.

a. 45,000 b. 6,429

c. 1,929 d. 4,500

Enter Response Here:

D. Calculate the Tax Savings from depreciation

a. 45,000 b. 6,429

c. 1,929 d. 4,500