Question

please solve questions 1 and 2

CASE STUDY PRESERVING LAND FOR PUBLIC USE Background and Information At a recent meeting, the following agreements were made: • Purchase the initial land increment now. Use the bond issue funds to assist with this purchase. Take the remain- ing amount from TPL reserves. Raise the remaining project funds over the next 2 years in equal annual amounts. Evaluate a financing alternative (suggested informally by one individual at the meeting) in which the TPL provides all funds, except the $3 million available now, until the parks development is initiated in year 4. The Trust for Public Land (TPL) is a national organization that purchases and oversees the improvement of large land sites for government agencies at all levels. Its mission is to ensure the preservation of the natural resources, while pro- viding necessary, but minimal, development for recreational use by the public. All TPL projects are evaluated at 7% per year, and TPL reserve funds earn 7% per year. A southern U.S. state, which has long-term groundwater problems, has asked the TPL to manage the purchase of 10,000 acres of aquifer recharge land and the development of three parks of different use types on the land. The 10,000 acres will be acquired in increments over the next 5 years with $4 million expended immediately on purchases. Total annual purchase amounts are expected to decrease 25% cach year through year 5 and then cease for this particular project. A city with 1.5 million citizens immediately to the south- cast of this acreage relies heavily on the aquifer's water. Its citizens passed a bond issue last year, and the city govem ment now has available $3 million for the purchase of land. The bond interest rate is an effective 7% per year. The engineers working on the park plan intend to com- plete all the development over a 3-year period starting in year 4. when the amount budgeted is $550,000. Increases in con- struction costs are expected to be $100,000 each year through year 6. Case Study Exercises 1. For each of the 2 years, what is the equivalent annual amount necessary to supply the remaining project funds? 2. If the TPL did agree to fund all costs except the $3 mil- lion bond proceeds now available, determine the equiv- alent annual amount that must be raised in years 4 through 6 to supply all remaining project funds. Assume the TPL will not charge any extra interest over the 7% to the state or city on the borrowed funds. 3. Review the TPL website (www.tpl.org). Identify some economic and noneconomic factors that you believe must be considered when the TPL is deciding to pur chase land to protect it from real estate development

Answer 1

Answer:

1)

Cash flows for parks development at G = $100,000 start in year 4 at $555,000. All the cash flow are as follow: Cash flow (S) Year Parks O 2 Land 4,000,000 3,000,000 2,250,000 1,678,000 1,26,625 949,219 3 550,000 650,000 750,000 Cash flows for purchase at g=-25% start in year 0 at $4 million and all cash flow has positive sign

Firstly calculate the value of P: P=4,000,000+3,000,000(P/F,7%,1)+......750,000(P/F,7%,6) = $13,171,600 Thus, the present value is $13,171,600. Annualised the present worth, amount to raise in years 1 and 2: A=(13,171,600-3,000,000)(A/P,7%,2) = 10,171,600(0.55309) = $5,625,800 Thus, the amount raise in year 1 and 2 is $5,625,800 per year.

Calculate the remaining project fund needs in year 3. then find A for nect 3 years: F3 = (13,171,600 - 3,000,000)(F/P,7%,3) = 10,171,600(1.225) = $12,460,210 Thus, the value of F3 is $12,460, 210 Calculate the value of A as follows: A = $12,460,210(A/P,7%,2) = $12,460, 210(0.3811) = $4,748,586.03 Thus, the amount necessary to supply the remaining project funds is $4,748,586.03 wwwwwvv poe juu 2. Find remaining project fund needs in year 3, then find the A for the next 3 years F3 = (13.1716-3.0)(F/P,7%,3) = $12.46019 A = 12.46019(A/P,7%,3) = $4.748 ($4,748,000 per year)

2)

Present worth of the cashflows is the value of future and past cashflows, as of today. Hence, it is the sum of present worth of all the cashflows into consideration. To find the present worth, we sum up the present worth of individual cashflows. Hence, Total PW = ŽPV ..Eq (1) Where Total PW is Net Present Worth at t = 0; PV is Present Worth of tth cashflow at t= 0; and n = total number of time periods

Also, we know that: PV = y - CF, (1+r) . ........Eq (2) Where PV is Present Worth of tth cashflow at t = 0; ris interest rate; CF+ is Cashflow in tth period In this question, the costs for years 4 through 6 are $550,000; $650,000 and $750,000 in years 4, 5 and 6 respectively. Now we have to raise equal amounts in year 4, 5 and 6. Let this amount be Now, using equations (1) and (2), we have: 550.000 650,000 750,000 X X 1.071.072 ***1.07 +1.072 Solving for we get x 563,798.