Question

Suppose that the marginal tax rate is 25%. If a farmer decides to purchase a combine it will increase his revenue by $7,500 per year, but it will also increase his expenses by $1,500 per year. The before tax rate on this investment is 30%. The life of this investment is 10 years. What is the present value of the after tax net return

Answer 1

Answer:

the present value of the after tax net return is $23,162.

Explanation:

Present day (discounted value) of net cash flows :

Net Cash flows = ( $7,500 - $1,500)

                         = $6,000

After tax Return = rate on this investment × (1 - tax rate)

                          = 0.30 × (1 - 0.25)

                          = 22.50 %

Number of Years = 10 years

Enter the Information in the financial calculator :

Pmt = $6,000, P/yr = 1, i = 22.50 %, N= 10 and Fv = 0

We get a Pv of $23,162.3137

Present Value is $23,162.