FNR 407 - Purdue University



FNR 407Examination No. 2, 20111. (6)What, if any, is the difference between tvg% and fvg%? Which one would be used to determine the financial maturity of an individual tree?2. (10)For each of these cases write in on the line the number of the equation that should be used to find the answer:a.______ Ms. Smith is preparing for a meeting with her financial advisor to develop her retirement plan. She estimates that when she retires she’ll need annual income of $60,000. Her life expectancy is 85 years, she’s 30 now, and will retire when she’s 70. Her financial advisor has recommended that she make her estimates assuming a 2% real rate of return. How much should she have in her retirement account when she starts her retirement?b._______ Assuming the same situation as in question a., what would her annual contribution to her retirement account have to be to have the amount estimated in a. by the time she reaches age 70.c._______ Bob Barker is going to start a business. He has developed a pro forma income statement and balance sheet in preparation for meeting with a banker that he has asked to provide him with a start-up loan of $1.2 million. The standard pay-back period for high risk loans like this is 5 years. If he gets such a loan what would his annual payments be?d._______ The board of a new charity is planning on developing an endowment large enough to cover 60% of its annual operating expenses on a permanent basis, i.e. for an indefinite number of years. Their banker recommends using a long-term real interest rate of 2% to determine the amount needed in the endowment. How would they determine this amount?e._______ Bobby Nelson’s grandfather tells him that he plans on putting $50,000 every other year into an investment account held in trust. Bobby won’t have access to the trust fund until grandfather dies. Grandfather said every other year because he adjusts his investment portfolio every other year. Grandfather estimates that based on his current age he’ll make 12 payments and the trust fund will earn 4% on average. At the end of 12 years how much can Bobby expect to have in his trust fund? 3. (6)You’re an analyst for a major timber real estate investment trust that holds primarily southern pine timberland. A majority of the exiting pine plantations are managed on 20-year pulpwood rotations. You present your boss with a market analysis showing that pulpwood prices are declining sharply and are expected to do so for many years. Your boss asks you to do the calculations needed to make a decision on whether to harvest these existing plantations now, or hold them until they reach rotation age. What value would you calculate to make such a determination?4. (6)If the nominal interest rate “i” is 5% and real interest rate “r” is 3%, what is the rate of inflation? Show you calculation. 5. (6) If the inflation rate “f” is 2% and the real interest rate “r” is 1%, what is “i”, the nominal interest rate? 6. (6)Historical analyses of price trends for hardwood logs and timber show that there has been an upward trend based on fitting a linear line through the data. Based on this information how should hardwood prices be projected?7. (6)If the nominal price of black walnut logs was $1,200 per MBF in 2005, the rate of inflation averaged 5% per year from 2005 to 2010, and the real price increase was 2% from 2005 to 2010, calculate the nominal price of these logs in 2010?8. (6)If all future cash flows are in nominal dollars, what interest rate should be used to calculate net present value (NPV)? Should it be f, r, or i? 9. (6)What is the formula for net present value, where, i - discount ratet - index on time in yearsn – length of investment period in yearsetc.10. (6)Dr. Brown calculated NPV for a timber investment with all revenues and expenses in nominal terms and used a nominal interest rate. He later discussed his analysis with a colleague who stated that he would get a more realistic result if he did the calculations with all real revenues, expenses and interest rate. How should Dr. Brown respond to his colleague? (Note: Dr. Brown did not include a real price increase for timber in his NPV calculation.)11. (6)A high quality black walnut tree is currently is in the 24-inch dbh class, giving a dib for the 16-foot butt log of 19 inches. This gives a Doyle volume of 225 board feet. Assuming the average diameter growth rate is 0.5 inches per year for the next 10 years the dbh will be 29 inches in 10 years, the dib will be 23 inches, and the Doyle log volume will be 360 board feet. The butt log is currently a select veneer log worth about $2,000 per MBF in 2007 dollars. At a dib of 23 inches the log will be prime veneer worth about $5,000 per MBF, also in 2007 dollars. (Focus on the values that are underlined.)If the owner’s real MAR is 4% should the tree be sold or kept? (Do the calculations to justify your answer.) 12. (6) Did the Purdue basketball team beat Illinois last evening?13. (6)If the NPV per acre at the end of the first 40 year rotation for an even-aged stand of pine is $10,000, what is the NPV of a perpetual series of such stands if the investor’s MAR is 2%? Formula number ________________ from handoutb. Show the equation with values for the variables:d. What term do foresters use for this NPV? _____________________________14. (6)If you buy an asset for $5,000 and sell it for $15,000, and the capital gains tax rate on the gain is 10%, how much tax would you owe? (Ignore inflation)15. (6) An acre of even aged timber has the values shown in the table below. If the owner’s MAR is 3.5% when should the timber be harvested? Justify you answer with appropriate calculations.YearValue ($’s)Calculations20103002012450201460020166502018700202072516. (6)If,WPL1 = $1,000, andWPL∞ = $1,120what is the contribution of all rotations past the first to WPL∞ ?Contribution = ___________________ ................
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