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F03-2 Solution

# F03-2 Solution - 1FINANCE 401 RYERSON UNIVERSITY Final Exam...

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1 FINANCE 401 - RYERSON UNIVERSITY Final Exam – Fall 2003 - Alan Kaplan Time allowed: 2 hours Aids allowed: 1 Cheat sheet, double sided, 8’1/2” by 11’ The exam is out of 100 Answer all questions in the space provided State any assumptions made and Please write or print clearly 1. (30 marks) John is a tree-farmer. He plants Christmas trees. Once they have grown from seedlings, he cuts them and sells them. After that, he replants new Christmas trees. He has one question. Should he cut them down after two years or three years. If he cuts them and sells them after three years, he can sell them for \$8 each. If he cuts them and sells them after two years, he can sell them for \$6 each. Each tree costs John \$3 in planting costs when he first plants them and then \$.50 per year in maintenance costs at the end of each year. John has 100 hectares of land and he can plant 1000 trees on each hectare. He pays \$100 per year per hectare in municipal land taxes, regardless of whether he has anything planted on the land or not. His tax rate for this business is 30%. His after-tax discount rate is 10%. The initial planting cost is considered a capital expense and can be depreciated on a straight line basis for tax purposes (the half-year rule does not apply). a. (10 marks) What is the NPV of planting the trees one time and selling them after two years?

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