Fernando is a veterinarian and has recently opened up a new clinic. After a year of operation, Fernando has decided that he needs to invest in a Digital Radiography (X-ray) system. The cost associated with a new high-quality machine is $50,000, which includes the panels, software and x-ray scintillator material. To afford the machine, Fernando will take out a fully amortized loan of $45,000 with a 7.5% interest rate and a term of 10 years. The remaining book value will be repaid at the end of the investment life. With the new machine, Fernando will be able to diagnose injuries more quickly and therefore increase his real operating receipts by $22,000 per year. However, his real operating expenses will increase by 7,000 per year. With an investment life of 5 years, a real terminal value of $25,000, straight-line depreciation over 6 years, marginal tax rate of 20%, inflation rate of 3%, risk premium of 2%, and a risk-free return to capital of 10%, answer the following questions. 1. What is the nominal pre-tax terminal value?
2. What is the after-tax, risk adjusted discount rate?
3. What are the real net returns?
4. What are the tax savings from depreciation?