Question

You determined the state will collect $15 million in timber sale revenue in 2012. Assume iflation is projected at 3.25 percent per year over the next 15 years and the nominal discount rate is 7 percent per year. What is the real (inflation adjusted) value of the 2012 timber sale revenue 15 years from now (in 2034 I assume)?

Answer 1

Answer:

Real Return = (Nominal Return - Inflation rate) / (1 + Inflation Rate)
Real Return = (0.07 – 0.0325) / (1 + 0.0325)
Real Return = 0.0375 / 1.0325
Real Return = 3.63%

Future Value = Present Value * (1 + r)^ n
Value in 2034 (FV) = ??
Today Value (PV) = $15,000,000
Rate (r ) = 3.63%
Time (n) = 15 years

Future Value = $15,000,000 * (1 + 0.0363) ^ 15
Future Value = $15,000,000 * 1.0363^15
Future Value = $15,000,000 * 1.7072
Future Value = $25,608,000

Value of $15,000,000 sales today will be $25,608,000 in Year 2034 I.e. after 15 years.