17A) Jon is considering the purchase of 340 acres of land for $1527.18 per acre.
ID: 2794613 • Letter: 1
Question
17A)
Jon is considering the purchase of 340 acres of land for $1527.18 per acre. A bank will loan him $1,290 per acre of land and the loan will be fully amortized over 20 years at 18%. The outstanding balance of the loan will be paid at the end of the third year. Assume that the marginal tax rate is 20%. Suppose that the following information is given:
Net Cash Flow before debt in Year 1= $162.00
Net Cash Flow before debt in Year 2= $177.00
Net Cash Flow before debt in Year 3= $1,522.00
How much down payment is needed?
a. $92,898 b. $64,512
c. $80,641 d. $76,125
e. None of the answers are correct
Calculate the amount of loan payment per acre per period.
a. $293 b. $241
c. $192 d. $197
e. None of the answers are correct
Calculate the per acre tax savings from paying interest in year 2.
a. $18 b. $21
c. $46 d. $20
e. None of the answers are correct
How much money needs to be generated from other parts of the business to cover the cash deficit in the 1st year, so that the investment is financially feasible?
a. $15,829 b. $19,787
c. $11,070 d. $23,744
e. None of the answers are correct
How much money needs to be generated from other parts of the business to cover the cash deficit in the 2nd year, so that the investment is financially feasible?
a. $12,457 b. $6,079
c. $15,571 d. $8,374
e. None of the answers are correct
Explanation / Answer
Amount required for acquisition of 340acres land = 340acres X 1527.18
=519241
Bank loan given = 340acres X $1290 per acre
=438600
Repayment start with down payment i.e year starting .
Annual repayment if amortised over 20 years at 14.4% (effective interest rate)
annuity factor for 20 years @ 14.4% = 1(for year 0) + 6.4055(for 19 years)
=7.4055
1) Down payment will be = Loan / annuity factor
=438600/6.3162
=69440
2) Loan payment per acre per period = $69440/340 acres
=$204
3) Savings on interest in 2nd year
interest in 2nd year = (Principle - Down payment) X 18%
=(438600-69400) X 18%
=66456
Total Savings =66456 X 20% = 13291
savings per acre = 13291/340
=39.09
4) Money needs to be generated from other parts in first year = $69440- (340acres X $162)
=$69440-$55080 = $14360
5)Money needs to be generated from other parts in second year =$69440-(340acres X $ 177)
= $69440-$60180 =$9260
answers e,e,e,e,e
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