Part B IIM Sustainable Farm Sdn Bhd, is doing well after its incorporation. Encik Yusof, CEO and majority shareholder, currently has a planting of 10,000 three-year-old Premium bamboo trees. This type of tree can be sold at a higher price than the more common bamboo trees. The trees are now 6 feet tall on average and can be sold for RM24 each. At present, 8-foot trees are priced at RM34 and 10-foot trees at RM40. Landscape contractors avoid trees larger than 10 feet tall because they are difficult to transplant successfully. With normal weather, the 6-foot trees will be 8 feet tall in another three years and 10 feet in six more years. Encik Yusof has to make financial decisions almost every day. Today's decision involves present value and future value computations, which Encik Yusof learned in Finance courses when he was a student at IIUM. Required: a) Due to inflation, Encik Yusof 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 (a) 8 feet or (b) 10 feet tall? (4 marks) b) If Encik Yusof discounts the future price of the trees at 10% per year, what is the present value of their future prices? (4 marks) c) Using time value of money concept, compute the growth rate of the trees (a) between the third year and the sixth year and (b) between the sixth year and the ninth year. (4 marks) d) When should IIM Sustainable Farm sell the trees? Why? (3 marks) 2 Part B IIM Sustainable Farm Sdn Bhd, is doing well after its incorporation. Encik Yusof, CEO and majority shareholder, currently has a planting of 10,000 three-year-old Premium bamboo trees. This type of tree can be sold at a higher price than the more common bamboo trees. The trees are now 6 feet tall on average and can be sold for RM24 each. At present, 8-foot trees are priced at RM34 and 10-foot trees at RM40. Landscape contractors avoid trees larger than 10 feet tall because they are difficult to transplant successfully. With normal weather, the 6-foot trees will be 8 feet tall in another three years and 10 feet in six more years. Encik Yusof has to make financial decisions almost every day. Today's decision involves present value and future value computations, which Encik Yusof learned in Finance courses when he was a student at IIUM. Required: a) Due to inflation, Encik Yusof 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 (a) 8 feet or (b) 10 feet tall? (4 marks) b) If Encik Yusof discounts the future price of the trees at 10% per year, what is the present value of their future prices? (4 marks) c) Using time value of money concept, compute the growth rate of the trees (a) between the third year and the sixth year and (b) between the sixth year and the ninth year. (4 marks) d) When should IIM Sustainable Farm sell the trees? Why? (3 marks) 2
