A farmer plans on selling the land in 6 years. He thinks the real land value wil

Question

A farmer plans on selling the land in 6 years. He thinks the real land value will be $700 in 6 years. Suppose that the marginal tax rate is 21% and the inflation rate is 8%.

(i)        Calculate the nominal terminal value.

a.

$756.00

b.

$877.54

c.

$847.00

d.

$1,110.81

                 e. None of the answers are correct

(ii)       Calculate the after-tax terminal value.

a.

$840.26

b.

$816.13

c.

$744.24

d.

$1,024.54

                 e. None of the answers are correct

a.

$756.00

b.

$877.54

c.

$847.00

d.

$1,110.81

Explanation / Answer

real value in 6 years=700 hence real value now is also 700
Hence, nominal value in 6 years=real value*(1+inflation)^6=700*1.08^6=1110.812 hence Option D
after-tax terminal value=1110.8128(1-21%)=877.5421 hence Option E

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