Drew owns and operates an onion packing plant. To help reduce costs on labor and to...

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Drew owns and operates an onion packing plant. To help reduce costs on labor and to increase efficiency, Drew is considering purchasing an automatic 50 lb. bagging machine and a machine that automatically stacks the 50 lb. bags onto pallets. The cost of the two machines combined and their installation is $300,000. Drew will make a 20% down payment and finance the rest of the machinery with an amortized loan over 15 years at a 5.5% interest rate. Drew predicts that by using these two machines, his plant will be able to increase output, therefore increasing operating receipts by $30,000 per year. Also, this machinery will save him approximately $10,000 in labor costs each year by the increase in efficiency. However, other operating expenses such as electricity and insurance will increase by approximately $5,000 per year. Drew assumed a straight-line depreciation over 15 years and the life of the investment is 7 years. The real terminal value is $180,000 after the 7 years, and Drew requires a pretax 10% rate of return to capital. The marginal tax rate over the 10 years is 25%, the rate of inflation is 3% and the risk premium is 1%. What is the nominal pre-tax terminal value? a.$180,000 b.$221,377.30 c.$206,032.97 d.$205,439.68 a.6.41% b.10% c.8.25% d.7.5% What is the after-tax, risk adjusted discount rate? a.$5,000 b.$7,142.86 c.$8,333.33 d.$1,666.67 a $180,000 b.$205,439.68 c.$216,032.97 d.$221,377.30 a.$30,430.94 b.$35,000 c.$31,343.87 d.$28,684.08 a.($4,541.74) b.$4,541.74 c.($19,071.16) d.$19,071.16 What are the tax savings from depreciation? What is the after-tax terminal value? What is the nominal after-tax net return in year 6? What is the net present value? Drew owns and operates an onion packing plant. To help reduce costs on labor and to increase efficiency, Drew is considering purchasing an automatic 50 lb. bagging machine and a machine that automatically stacks the 50 lb. bags onto pallets. The cost of the two machines combined and their installation is $300,000. Drew will make a 20% down payment and finance the rest of the machinery with an amortized loan over 15 years at a 5.5% interest rate. Drew predicts that by using these two machines, his plant will be able to increase output, therefore increasing operating receipts by $30,000 per year. Also, this machinery will save him approximately $10,000 in labor costs each year by the increase in efficiency. However, other operating expenses such as electricity and insurance will increase by approximately $5,000 per year. Drew assumed a straight-line depreciation over 15 years and the life of the investment is 7 years. The real terminal value is $180,000 after the 7 years, and Drew requires a pretax 10% rate of return to capital. The marginal tax rate over the 10 years is 25%, the rate of inflation is 3% and the risk premium is 1%. What is the nominal pre-tax terminal value? a.$180,000 b.$221,377.30 c.$206,032.97 d.$205,439.68 a.6.41% b.10% c.8.25% d.7.5% What is the after-tax, risk adjusted discount rate? a.$5,000 b.$7,142.86 c.$8,333.33 d.$1,666.67 a $180,000 b.$205,439.68 c.$216,032.97 d.$221,377.30 a.$30,430.94 b.$35,000 c.$31,343.87 d.$28,684.08 a.($4,541.74) b.$4,541.74 c.($19,071.16) d.$19,071.16 What are the tax savings from depreciation? What is the after-tax terminal value? What is the nominal after-tax net return in year 6? What is the net present value?

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The detailed answer for the above question is provided below To answer your questions lets go through each one step by step 1 What is the nominal pretax terminal value Given that the real terminal val... View the full answer