Question

1. Because of inflation, Jake expects the price at which he can sell the trees to increase by 3% per year. What price does he expect to receive if he keeps the trees until they reach 8 feet or 10 feet tall?
2. If Jake discounts the future price of the trees at 10% per year, what is the present value of their future prices?
3. Using time value of money equation, compute the growth rate of the trees between the third and the sixth year, and between the sixth and the ninth year.
4. When should Jake sell the trees?
5. A major landscape contractor, who has bid successfully on a large-scale Boston beautification and urban greening project, has offered to buy all 10,000 of the flowering dogwood trees at a price of $28,000, to be paid immediately. The trees, however, will not be needed for three years. If Jake accepts, he will be obliged to deliver 10,000 trees 3 years from today. If anything should happen to his own crop, he would need to buy trees on the open market at the prevailing price, which might be higher or lower than the price estimated in question 1. Should Jake accept the offer if his required rate of return is 10%? Hint: what is the present value of the price he expects to receive for the trees 3 years in the future? Discount the price at 10%.



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  • CreatedMay 08, 2014
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