A farmer expects irrigation system will increase real operating receipts by $22,000 per year but will also increase real operating expenses by $5,000. Suppose that the inflation rate is 3% and the marginal tax rate is 15%.

(i) What is the nominal net return at the end of year 2?

a.         $16,490                                   b.        $18,035

c.          $17,000                                  d.         $19,550

(ii) Calculate the nominal after-tax net return at the end of year 5.

a. $19,708                                b. $19,550

c. $18,963                                d. $16,752

Given the following information :

            Nominal Initial Cost = $90,500;       Nominal Before-tax Net Return = $7,000

            Marginal Tax Rate = 20%;               Required rate of return = 11%

            Real Terminal Value = $110,500;    Investment Life = 5 years

Suppose that IRS will allow the investor to depreciate the investment using straight-line over 12 years and the inflation rate is 5%.

(i) What is the annual depreciation expense?

a.         $7,452                                    b.         $7,919

c.          $8,100                                    d.         $7,905

(ii) What are the tax savings from depreciation?

a. $819.72                              b. $1,490.40

c. $372.60                               d. $1,400.00