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 (see below). 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 three years in the future? Discount the price at 10%. (10 points) 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? The trees which are currently 6 feet tall will grow to 8ft. in 3 years and 10 feet in 6 years from now. Hence the price that Jake can expect to receive at 8 and 10ft. heights can be calculated as follows Using formulas FV=34(1.03)3=37.15,FV=34(1.03)6=47.76 Using a financial calculater:Ni/yPVPMTFV33-34037.1563-40047.76 The trees Will be worth $37.15 in 3 years and $47.16 in 6 years 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 (see below). 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 three years in the future? Discount the price at 10%. (10 points) 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? The trees which are currently 6 feet tall will grow to 8ft. in 3 years and 10 feet in 6 years from now. Hence the price that Jake can expect to receive at 8 and 10ft. heights can be calculated as follows Using formulas FV=34(1.03)3=37.15,FV=34(1.03)6=47.76 Using a financial calculater:Ni/yPVPMTFV33-34037.1563-40047.76 The trees Will be worth $37.15 in 3 years and $47.16 in 6 years
