Question

A farmer is considering the purchase of additional farmland. Given the present value of after-tax net return of $32.55, a marginal tax rate of 16%, a terminal value of $679.85, and an after-tax discount rate of 19.80%. This farmer is planning on selling the land in 14 years. What is the maximum price this farmer should be willing to pay for an acre of land

Answer 1

$ 78.08

Step-by-step explanation:

The maximum price the farmer would pay for the land is the present value of all its future cash flows, in other words, the present value of all its annual cash flows for 14 years which is $32.55 plus the present value of the sales value at the end of year 14 after having adjusted for a tax rate of 16%

Maximum price=present value of after-tax net return +PV of after-tax terminal value

present value of after-tax net return =$32.55

after-tax terminal value=$679.85*(1-16%)=$571.07

PV of after-tax terminal value =after-tax terminal value*PV factor of 19.80% for year 14( i.e 0.079727)

PV factor=1/(1+19.80%)^14=0.079727

Maximum price=$32.55+($571.07*0.079727)

maximum price=$ 78.08