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Lecture 9

AGEC 330 Lecture Notes - Lecture 9: Tax Rate, Center Pivot Irrigation, Cash Flow Statement


Department
Agricultural Economics
Course Code
AGEC 330
Professor
David Leatham
Lecture
9

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A farmer is considering borrowing money from a bank. Given the following information: 5/10
Initial loan amount is $52,000.
The loan will be fully amortized in 3 years at 10%.
Marginal tax rate is 15%.
i) What is the loan balance at the end of 1st year? ~ $36,290.03
ii) What is the loan balance at the end of 2nd year?~ $23,957.70
A farmer is considering borrowing money from a bank. Given the following information:
Initial loan amount is $250,000.
The loan will be fully amortized in 3 years at 14%.
Marginal tax rate is 15%.
What is the principal payment in the 1st year?~ $72,682.87
What is the principal payment in the 2nd year?~ $82,858.47
A farmer is considering borrowing money from a bank. Given the following information: 5/10
Initial loan amount is $250,000.
The loan will be fully amortized in 3 years at 14%.
Marginal tax rate is 15%.
What is the tax saving in the 1st year?~ $6,176.47
What is the tax saving in the 2nd year?~ $3,723.66
Principal payments on a fully amortized loan decrease over the life of the loan. FALSE
Tax Savings from interest can be found by multiplying the before-tax risk free discount rate by the
interest paid. FALSE
______________ is the s um of principal payme nt and inte rest payme nt.
Loa n P ayment pe r period
Fully Amortized loa n implie s a n e qual periodic pa yment including principa l a nd intere st.
TRUE
A fa rmer is conside ring borrowing mone y from a ba nk. Give n the following informa tion:
Initial loan a mount is $66,000.
The loa n will be fully a mortized in 3 yea rs a t 8%.
Ma rgina l ta x ra te is 15%.
A~ $25,610.21
A rancher borrowe d money to purcha se a new truck 4 yea rs ago. The annual loan
payme nt is $32,000, the interes t rate is 4% a nd there are 2 yea rs le ft on the loa n. How
much mone y does the ra ncher s till owe on the loa n?
~ $60,355.03
Given the following loa n informa tion:
Annua l loa n payme nt = $18,000
Numbe r of rema ining pe riods = 4
Inte res t rate = 10%
Wha t is the book va lue of the loan?
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~ $57,057.58
Given the following informa tion:
Initial Loa n Amount = $36,200
Inte re st Ra te = 6%
Fully a mortize d loa n over 10 ye a rs .
What is the annual loan payment?
~ $4,918.42
What is the remaining principal balance on the following loan at the end of 4 years?
~ $24,185.47
A farmer wants to borrow $97,300 for a tractor. The loan would be fully amortized over 20 years
at 14% interest.
Annual loan payment~ 15,841.31 remaining prin balance 15 years ~ 50,435.18
Projected Cash Flow Statement can be used to determine if an investment is financially
feasible.~ TRUE
Cash flows stated in nominal dollars over time cannot be converted to real dollars. ~ FALSE
Infla tion is a n increa s e in the ge ne ral le ve l of price s for a ll goods a nd se rvices in a n
economy. ~TRUE
Rea l Price s a re the prices that reflect today’s purchasing power at a specific point in
time . ~TRUE
What is the nomina l price of a truck in 15 ye a rs if the re a l price is $25,000, a nd the
infla tion rate is 3%? ~$38,949.19
The yield on a bond is 15% and infla tion is expected to be 5%. Ca lcula te the re a l
inte re s t ra te on the bond. ~9.52%
_____________ is a n a mount that ma kes you indiffe re nt betwe e n playing a nd not
pla ying the game . ~ Certa inty e quivalent
Ris k premium doe s not de pend on : individua ls budget
Given the following information :
Nominal Initial Cost = $30,000; Nominal Before-tax Net Return = $4,000
Marginal Tax Rate = 15%; Required rate of return = 10%
Real Terminal Value = $20,000; Investment Life = 8 years
Suppose that IRS will allow the investor to depreciate the investment using straight-line over 10 years and the inflation
rate is 4%.
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(i) What is the annual depreciation expense?
a. $3,450 b. $3,750
c. $3,120 d. $3,000
enter response here: [i]
(ii) What are the tax savings from depreciation?
a. $450 b. $300
c. $120 d. $600
enter response here: [ii]
Specified Answer for: i
d
Specified Answer for: ii
a
A farmer expects irrigation system will increase real operating receipts by $20,000 per year but will also increase real
operating expenses by $8,000. Suppose that the inflation rate is 4% and the marginal tax rate is 20%.
(i) What is the nominal net return at the end of year 2?
a. $12,000 b. $14,400
c. $12,972 d. $11,520
ENTER RESPONSE HERE: [i]
(ii) Calculate the nominal after-tax net return at the end of year 2.
a. $10,383 b. $13,824
c. $14,400 d. $17,280
ENTER RESPONSE HERE: [ii]
Specified Answer for: i
c
Specified Answer for: ii
a
Nominal cash flows can be discounted by either a nominal discount rate or a real discount
rate.
Selected Answer:
False
Nominal cash flows can be discounted by either a nominal discount rate or a real discount
rate. However, real cash flows must be discounted by a real discount rate only.
Selected Answer:
False
Real cash flows can be discounted by a real discount rate only.
Selected Answer:
True
Suppose that the inflation rate is 4% and the real terminal value of an investment is
expected to be $70,000 in 4 years. Calculate the nominal terminal value of the investment
at the end of year 4.
$81,890
Given the following information:
Nominal Initial Cost = $25,000; Nominal Before-tax Net Return = $5,000
Marginal Tax Rate = 15%; Required rate of return = 10%
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