Mr. Agirich has the opportunity to purchase some farm land at $3,000/acre. He expects that real land prices will increase at 5% per year and inflation will be 2%. His pretax risk adjusted discount rate is 14%. Assume that the land will be sold in 10 years and the marginal tax rate is 23%. The effective interest rate on land loans is 6%. (i) Calculate the after-tax risk adjusted discount rate.
a. 14%
b. 10.7%
c. 6%
d. 4.6%
e. None of the answers are correct
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(ii) Calculate the real price of land in 10 years.
a. $3,657
b. $8,291
c. $4,887
d. $5,373
e. None of the answers are correct
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(iii) Calculate the nominal price of land in 10 years.
a. $4,458
b. $6,550
c. $10,019
d. $5,957
e. None of the answers are correct
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(iv) Calculate the after-tax terminal value of the land.
a. $5,957
b. $5,277
c. $4,887
d. $3,000
e. None of the answers are correct
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(v) Calculate the Present Value of the after-tax terminal value.
a. $2,140
b. $1,756
c. $1,896
d. $1,077
e. None of the answers are correct
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(vi) What is the approximate maximum bid price for this land?
a. $5,140
b. $4,756
c. $4,077
d. $4,896
e. None of the answers are correct