NAME: ______

FNR 407

Examination No. 2, 2007

1. (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 greater than zero, 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, what is the approximate internal rate of return (IRR)?

Discount rate (i) / NPV
10% / -$1,560
9% / -$900
8% / -$20
7% / $2,300
6% / $5,000

IRR = ______

3. (6)If the rate of inflation is very high and is expected to stay high what actions would rational consumers take?

4. (6)If the nominal rate of interest “i” is 6% and the inflation rate “f” is 2%, what is the value of “r”, the real interest rate? 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. (9)Referring to the graph below, the trend line shows an average annual compound rate of increase of 1.1% from 1957 to 2006 for the real price per MBF for the timber in an average stand of timber? The equation for the trend line is $/MBF = $166.36 + 2.62 * T, where T = 50 in 2006, 51 in 2007, etc.

a.The trendline price in 2006 is $297.36 per MBF. What would the predicted trend line price be 20 years later, i.e. in the year 2026, if the real price is assumed to increase at the historical average annual compound rate of increase of 1.1%?

b.What would the predicted trend line price be 20 years later, i.e. in the year 2026, if the real price is assumed to increase linearly?

c.Which method of projection is the most realistic and why?

7. (6)If the nominal price of black walnut logs was $1,200 per MBF in 1986, the rate of inflation averaged 5% per year from 1986 to 2006, and the real price increase was 2% from 1986 to 2006, calculate the nominal price of these logs in 2006?

8. (6)If all future cash flows are in real (constant) dollars, what interest rate should be used to calculate net present value (NPV)? Should it be f, r, or i?

9. (6)If future cash flows are in nominal (current) dollars, what interest rate should be used to compute NPV? Should it be f, r, or i?

10. (6)If the correct interest rate, f, r, or i, was used in calculating NPV in questions 8 and 9, what would the relationship be between the NVP’s calculated in both cases?

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.

If the owner’s real MAR is 4% should the tree be sold or kept? (Do the calculations to justify your answer.)

12. (6) You and your spouse are considering the purchase of a house. You have $30,000 for the down payment. A conventional mortgage requires a 20% down payment which means the most you can borrow is $120,000. What would the annual payments be for a 15 year fixed rate mortgage at 3.5%? Give the number of the formula you need to use on the cheat sheet, write out the complete equation with the values for this problem shown. Calculate the answer if you have time.

  1. Formula number ______Check One: _____ book, _____ handout

b. Show the equation with values for the variables:

  1. Amount of annual payment ______

13. (6)If the NPV per acre at the end of the first 40 year rotation for an even-aged stand of pine is $25,000, what is the NPV of a perpetual series of such stands if the investor’s MAR is 3%?

  1. Formula number ______Check One: _____ book, _____ handout

b. Show the equation with values for the variables:

c. Answer ______IF YOU HAVE TIME TO DO THE CALCULATIONS

d. What term do foresters use for this NPV? ______

14. (6)If you buy an asset for $5,000 and sell it for $10,000, and the capital gains tax rate on the gain is 10%, how much tax would you owe?

15. (6) The XYZ 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 indicated that the total cost of production and marketing can be adequately represented by the equation,

TC = $800 - $200 Q + 1.0 Q2

How much lumber should this firm produce to maximize their net revenue (profit)? Show your work.

16. (6)If,

WPL1 = $1,000, and

WPL∞ = $1,120

what is the contribution of all rotations past the first to WPL∞ ?

Contribution = ______