A rancher is considering the purchase of additional land to expand operations. He can operate an additional 500 acres with present labor and machinery. The land is selling for $600 per acre. This rancher believes that the operating revenue per acre of land will be $500 and operating expenses will be $400 in present dollars. He expects the inflation rate will be 4%. The rancher will sell the land in 3 years and he anticipates that land prices will increase at the rate of inflation from the base of $600 per acre. A bank will loan him $450 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. Assume that the marginal tax rate is 15% and that he requires at least a 8% pre-tax, risk-free return on capital and a 2% risk premium on projects of comparable risk.

(i) Calculate the nominal after-tax net returns at the end of year 2.

            a. $86.35                                                         b. $105.74

            c. $91.94                                                       d. None of the answers are correct

(ii) What is the present value of the nominal after tax net return after 3 years?

            a. $234.43                                                     b. $256.89

            c. $215.25                                                       d. None of the answers are correct

(iii) What is present value of the after-tax terminal value after 3 years?

            a. $504.67                                                      b. $519.60

            c. $511.74                                                       d. None of the answers are correct

(iv) What is the net present value?

            a. $172.83                                                      b. $127.32

            c. $154.03                                                     d. None of the answers are correct