Financial Exercises 5: Investment Timing: Unterschied zwischen den Versionen

''by Clemens Werkmeister''

Ten years ago, John Walden planted Nordman fir trees. The plan is to fell them and sell them as christmas trees. For reasons of efficiency, it is best to fell the complete lot. But John can decide whether to harvest the trees early or to wait and get higher revenues for larger trees. The following table contains the expected revenues for felling the trees in the given year. Walden assumes a 10 % cost of capital.<br/>

|- align="center"

|year|| alternative cash flows

|0||180  

|}

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a. Calculate the additional annual cash flow and the opportunity cost of capital for deferring the felling to years 11 to 15. Calculate the difference between additional cash flows and opportunity costs (the economic value added) for years 11 to 15. <br/>

b. Calculate for years 11 to 15 the percentage change of revenues compared to the previous year.<br/>

Jim Weam produces premium wine whose extraordinary flavour depends on the old barrels he uses. The cost of grapes and processing are 150 € per barrel. Handling and preparing the barrel every other year of maturing costs 10 €. While maturing in barrels up to five years, the wine price increases. The following table lists the expected revenues per barrel if the wine is sold after x years of maturing:<br/>

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|years of maturing|| cash flows if sold in year|| annual costs until sale

|0||600 ||  

|}

b. Calculate the NPVs if the wine is sold after year 1, 2, …, 5. Which is the best year to put the wine into market?<br/>

c. Since the barrels that guarantee the extraordinary flavour of Jim Wean’s wines are scarce and hard to get, they are reused. What does this mean for the best age of marketing Jim Wean’s wines? Compare the annuities.<br/>