An owner of a large ranch is considering the purchase of tractor with a front-end loader to clean his land instead of hiring workers. The equipment costs $35,000. This ranch expects that he will save $12,500 a year that is usually paid to workers who do it by hand. However, he will incur an additional cost of $1,500 for fuel, repair, and maintenance. The rancher plans on keeping the equipment for 5 years before replacing it with a new one. He thinks he can sell the old equipment for $23,500 in 5 years. He anticipates that its marginal tax rate will be 15% over the next five years. The IRS will allow the rancher to depreciate the tractor over 10 years using the straight-line method. The rancher requires at least a 20% pre tax rate of return on capital (pretax). return on capital (pretax).
(i) What is the annual after-tax net return?
a. $9,350
b. $9,200
c. $11,500
d. $8,400
(ii) What is the tax savings from depreciation?
a. $7,482
b. $5,714
c. $1,143
d. $525
(iii) What is the after-tax terminal value?
a. $24,500
b. $22,600
c. $40,000
d. $25,000
(iv) What is the after-tax discount rate?
a. 17%
b. 35%
c. 3%
d. None of the above
(v) What is the present value of the after-tax terminal value?
a. $12,837.85
b. $11,673.42
c. $10,308.11
d. None of the above
(vi) What is the maximum fuel, repairs and maintenance cost that can be paid each year to operate the loader and still find this investment profitable?
a. $6748
b. $3285
c .$5000
d. $4037