FNR 407 - Purdue University



FNR 407Examination No. 2, 20121. (6)If a firm’s minimum acceptable rate of return (MAR) is used as the discount rate in the calculation of NPV, and the NPV is negative, what is the relationship between MAR and the internal rate of return (IRR)?2. (6)Given the following schedule of NPV’s and discount rates, Discount rate (i)NPV10%-$1,3009%-$5008%$1,2007%$4,5006%$30,000what is the approximate internal rate of return (IRR)?3. (6)There was recently a report of an inflation rate of 500% per month in an underdeveloped country in South American. What are some of the negative effects of high inflation rates? (Think of the effect on prices as signals to consumers and producers in a competitive market.)4. (6)If the real rate of interest “r” is 4% and the inflation rate “f” is 3%, what is the value of “i”, the nominal interest rate? Show you calculation. 5. (6) A firm’s total cost to produce electronic wooden widgets is represented by the function,TC = 20 + 10Q – 0.5 Q2What is the equation for this firm’s supply curve?6. (6)A charitable organization in a large city is considering the purchase of a corner lot on the edge of the city to sell things to raise funds. The lot will cost $30,000. They have had the most success selling Christmas trees at an average price of $70.00 each. Their average cost is $20.00 per tree. If all other expenses are covered by volunteer labor, how many trees do they need to sell to breakeven on the purchase of the lot and raise $20,000?7. (6)If the nominal price of black walnut logs was $1,200 per MBF in 1986, the rate of inflation averaged 3% per year from 1992 to 2012, and the real price increase was 2% from 1992 to 2012, calculate the nominal price of these logs in 2012?8. (6)The Fancy Furniture Company makes expensive accessory pieces with inlaid veneer designs. Currently the demand curve for their products is represented by the equation,P = 600 – 10 QThey conduct a promotion and advertising campaign to increase their share of the market for the kind of furniture they produce. This means that they aren’t concerned about selling at a higher price, just sell more at the price they currently charge. Should the Fancy Furniture Company expect a movement along their demand curve, or a shift to the right?10 additional points: If demand doubles at all price levels, what is the equation of the firm’s new demand curve?9. (6)There are about 30 pizza shops in West Lafayette, making the pizza business very competitive. If the market for manly-man greasy-grimy meat pizza in West Lafayette can be represented by the demand curve,Qd = 100 – 2 PAnd, the supply curve by Qs = 55 + PWhat price should buyers expect to pay for this kind of pizza in West Lafayette? 10. (6)If the NPV for a single rotation of intensively managed loblolly pine was calculated using a real discount rate of 2.5%, and calculated again using the nominal discount rate of 6.25% what would the relationship be between the two NPV’s? (Assume that the inflation rate is the same for all revenues and expenses, including timber.) 11. (6)A high quality black walnut tree is --Currently 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. The butt log is currently a select veneer log worth about $1,000 per MBF in 2012 dollars. 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. At a dib of 23 inches the log will be prime veneer worth about $4,000 per MBF, also in 2012 dollars. If the owner’s real MAR is 4% should the tree be sold or kept? (Do the calculations to justify your answer.) 12. (6) Ms. Andrea Foster, a consulting forester, was preparing to mark in the winter of 2012 a once-in-a-life time stand of very high quality timber. The owner is a professional investment manager so he expects her to mark the timber based on sound financial criteria. The guiding rate of return he uses for making investment decisions, his MAR, is 10%. She projects the value of the best black walnut tree in the stand as given in the following table. In what year should this tree be sold, assuming that the owner wants to maximize his financial return from the stand? (Show your calculations.)YearTree’s Value2012$2,0002022$3,0002032$6,0002042$11,0002052$12,00013. (6)The American Chestnut Company is selling backcross seedlings that are “guaranteed” to be blight resistant. Because of high start-up costs they need to maximize total revenue. They raised their price by 4% 6 months ago and their revenue went up by 10%. Is the price elasticity of demand for their seedlings elastic or inelastic?Would an additional price increase most likely increase revenue further?14. (6)Why can’t monopolists charge whatever price they want for their product, after all they have no competition?15. (6) The ACE Lumber Company sells its products into a highly competitive market. The average market price for its lumber is currently $700 per MBF. A cost study indicates that the total cost of production and marketing can be represented by the equation,TC = $250 - $300 Q + 2.0 Q2How much lumber should this firm produce to maximize their net revenue (profit)? Show your work.16. (6)If,WPL1 (SEV for 1st rotation) = $10,000, andWPL∞ (SEV) = $10,500,what is the contribution of all rotations past the first to WPL∞ ? ................
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