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T. R. Farmer owns 500 acres of woodland worth $100,000. He has paid off the mortgage on this tract except for $10,000 which he still owes the bank. He has a chance to buy an adjoining woodland tract of 100 acres. The price for this tract of woodland would be $15,000. Mr. Farmer expects an annual land inflation rate of 10% for the years ahead. However, he can expect a cash income above expenses of only $400 per year from this 100 acre tract. The local Land Bank will loan up to 70% of land value at 9% annual interest for 40 years.

a.  What is Farmer's present equity?  $_____________________.
b.  How much down payment on the 100 acre tract would the Land 
    Bank require?  $___________________.
c.  What is Farmer's credit limit?  $_________________________.
d.  To buy the tract, how much total debt would he assume?
e.  With an annual net cash income of $1,550 from the larger 
    tract, how much cash would be available for payments?
f.  Farmer's annual payment on his debt load would be?
g.  How much could he afford to pay for the 100 acres and expect 
    to meet annual mortgage payments?  $___________________.
h.  If Farmer has a savings account at his Savings & Loan of 
    $20,000 on which he is being paid 5-3/4% interest, what 
    should he do?  ____________________________________________.

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Last revised September 3, 1995.

Please send comments to: Duane Bristow (72711.1414@compuserve.com)