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Calculate the present value of the after tax net returns to land in the 7th year...

Calculate the present value of the after tax net returns to land in the 7th year if thereal pre-tax net returns to land today are $250, real net returns to land are assumedto increase by 5% each year, inflation is 4%, the marginal tax rate is 20%, and thepretax risk adjusted discount rate is 10%.

a.

270.10
b.

216.08
c.

105.27
d.

163.84
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Answer:

Fn = Fo (1+g) n = 250(1.05)7 = 351.775

Nominal net returns = 351.775 (1.04)7 = 462.912

After tax return = 462.912 (1 - 0.2) = 370.33

After-tax, risk adjusted discount rate = .1(1-.2) = 0.08 ot 8%

PV(after-tax net return in 7th year = 370.33 (1+.08)-7 = 216.08

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