Question

Kristi Henderson ormation n Mr. Agirich of Aggie Farms is considering the purchase of 100 acres of prime ranch land that is adjacent the ranch he now owns. Mr. Agirich can operate the additional 100 acres with present labor, machinery and breeding livestock. The land is selling for $400 per acre. Mr. Agirich believes that the operating receipts per acre of land per year will $450 and operating expenses will be $420 in present dollars. Mr. Agirich expects that the inflation rate will be 3% and operating receipts and expenses per acre will increase at the rate of inflation. The farmer will sell the land in three years and he anticipates that land prices will increase at the rate of inflation (from a base price of $400). A bank will loan him $350 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 (balloon payment). Assume that the marginal tax rate is 30% and that Mr. Agrich requires at least a 6% pre-tax, risk-free return on capital and a 4% risk premium on projects of comparable risk. (Do the analysis on a per acre basis.) 10 points QUESTION 15 What is the tax savings from interest payments in the third year? O $313.54 O $46.02 O $9.81 O -$13.57 O None of the above QUESTION 16 10 points What is the Net Cash Flow after debt flows at the end of the second year? $313.54 $46.02 $9.81 -$13.57 None of the above

Answer 1

nciple B 300O4S8 3wo llo 338182 2 333 28 y2-43268e eg 3 3268666ol-S8 3268 3329 313s3.98 ) 3268 68 x30/ 9e0 . 609 9.806 Pee a ae

Alet Cast, tlous afleu det flocos at end of the secoud yeau 31.82구 22.279 2384.8 301 Net Caak ow - 13.S