Your siblings and you decide to purchase the farm to keep it in the family. The plan is to purchase the land and make a number of forest management investments, with the intent of generating income from timber and leasing the hunting rights.
Your estimated costs and returns are as follows:
• $900/acre purchase price of land, paid back annually in equal installments over 10 years @ 6% annual interest.
• $300/acre tree planting costs incurred 1 year after purchase.
• $1000/acre forest management costs 3 years after purchase.
• $50/acre forest management costs in starting 5 years after purchase and continuing until 10 years after purchase (years total).
• Annual hunting lease of $100/acre beginning in years 6 years after purchase and continuing until 15 years after acquiring the land.
• $5/acre/year in property taxes and liability insurance, beginning immediately and paid each year you own the land.
• $3,000/acre income from the sale of timber 15 years after acquiring the land.
• $1,200/acre from the sale of your forest land 16 years after acquiring the land. You sell your land on the last day of this year.
• Your ARR is 4%.
1-What is the present value of the tree planting cost?
2-What is the present value cost of the $1,000 forest management cost?
3-What is the present value of the revenue generated from selling the forest land?
4-What is the present value of the 1st payment received for the hunting lease?
5-What is your annual payment for the loan you took out to purchase the land?
6-What is the present value of the 5th loan payment?
7-What is the present value of the revenue generated from timber harvesting?
8-What is the NPV of revenue and costs in the year you sell the forest land?
9-What is the net present value of revenue and costs incurred in year 10?
10-What is the net present value of revenue and costs incurred in year 11?
11-What is the discounted sum of revenue and costs in year 3
12- Assume these new values of certain revenue and costs for the project. Unless they are specified below, use the original revenue and cost assumptions listed at the top of this assignment. .
· $1,000/acre land purchase price, paid back annually in equal installments over 7 years @ 3% annual interest.
· No hunting lease revenue.
· $1,500/acre timber sale income 10 years after acquiring the land (instead of receiving $3,000 in timber income 15 yrs after acquiring the land).
· $2,500/acre from the sale of your forest land 16 years after acquiring the land.
Re-evaluate the project's worth (i.e., calculate the NPV of this project) using these new values for certain benefits and costs.