A farmer has recently bought a land for $2,000.00 and planned on selling the lan
ID: 2803187 • Letter: A
Question
A farmer has recently bought a land for $2,000.00 and planned on selling the land in 8 years. The real price of land is expected to increase at 2% each year. Suppose that the inflation rate is 14% and the marginal tax rate is 11%.
(i) Calculate the real land price.
a. $1,526.11 b. $2,034.81
c. $2,484.87 d. $2,343.32
e. None of the answers are correct
Enter Response Here:
(ii) Calculate the before-tax nominal terminal value.
a. $2,343.32 b. $6,684.52
c. $2,015.25 d. $2,085.55
e. None of the answers are correct
Enter Response Here:
(iii) Calculate the after-tax-nominal terminal value.
a. $6,169.22 b. $1,828.02
c. $5,490.61 d. $5,949.22
e. None of the answers are correct
Explanation / Answer
(i) Real land price = 2000*1.02^8 = $ 2,343.32 Answer: Option [d] (ii) Before tax nominal terminal value: Nominal rate of increase = (1+real rate)*(1+inflation rate)-1 = 1.02*1.14-1 = 16.28% Before tax nominal terminal value = 2000*1.1628^8 = $ 6,684.52 Answer: Option [b] (iii) Gain in terminal value = 6684.52-2000 = $ 4,684.52 Tax on gain at 11% $ 515.30 After tax nominal terminal value = 6684.52-515.30) = $ 6,169.22 Answer: Option [a]
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