You own 500 acres of timberland You own 500 acres of timberland You own 500 acres of timberland You… 1 answer below »

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Making Investment Decisions with The Net Present Value Rule

You own 500 acres of timberland, with young timber worth $40,000 if logged now. This represents 1,000 cords of wood worth $40 per cord net of costs of cutting and hauling. Apaper company has offered to purchase your tract for $140,000. Should you accept the offer? You have the following information:

Yearly Growth Rate
Years of Cords per Acre
1–4 16%
5–8 11
9–13 4
14 and subsequent years 1

• You expect price per cord to increase at 4 percent per year indefinitely.
• The cost of capital is 9 percent. Ignore taxes.
• The market value of your land would be $100 per acre if you cut and removed the
timber this year. The value of cut-over land is also expected to grow at 4 percent
per year indefinitely.

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