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

by OC1737749

School

Texas A&M UniversityDepartment

Agricultural EconomicsCourse Code

AGEC 330Professor

David LeathamLecture

9This

**preview**shows pages 1-3. to view the full**21 pages of the document.**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.

Selected Answer:

$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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