Question: Given the following information: Nominal Initial Cost = $25,000; Nominal Before-tax Net Return = $5,000 Marginal Tax Rate = 15%; Required rate of return =

Given the following information:

Nominal Initial Cost = $25,000; Nominal Before-tax Net Return = $5,000

Marginal Tax Rate = 15%; Required rate of return = 10%

Real Terminal Value = $0; Investment Life = 8 years

Suppose that IRS will allow the investor to depreciate the investment using straight-line over 10 years and the inflation rate is 4%.

(i) What is the nominal terminal value?

a. $0 b. $25,000

c. $20,000 d. $22,000

(ii) What is the annual depreciation expense?

a. $3,250 b. $2,600

c. $3,125 d. $2,500

(iii) What is the nominal after-tax terminal value?

a. $750 b. $722

c. $700 d. $725

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