Question

A farmer expects irrigation system will increase real operating receipts by $22,000 per year but will also increase real operating expenses by $5,000. Suppose that the inflation rate is 3% and the marginal tax rate is 15%. (i) What is the nominal net return at the end of year 2

Answer 1

Answer:

$18,035.30

Explanation:

nominal net return year 1:

• ($22,000 x 1.03) - ($5,000 x 1.03) = $22,660 - $5,150 = $17,510

nominal after tax return year 1:

• {($22,000 x 1.03) - ($5,000 x 1.03)} x (1 - 15%) = ($22,660 - $5,150) x 0.85 = $14,883.50

nominal net return year 2:

• ($22,660 x 1.03) - ($5,150 x 1.03) = $23,339.80 - $5,304.50 = $18,035.30

nominal after tax return year 2:

• {($22,660 x 1.03) - ($5,150 x 1.03)} x 0.85 = ($23,339.80 - $5,304.50) x 0.85 = $14,883.50