You are considering an investment in a tree farm. Trees grow each year by the following factors: The price of lumber follows a binomial lattice with 0. The interest rate (risk-free) is constant
at 6%. It costs $2 million each year, payable at the beginning of the year, to lease the forest land. The initial value
of the trees is $5 million (assuming they were harvested immediately). You can cut the trees at the end of any
year and then not pay rent after that. With rent of $2 million per year, find the best cutting policy and the value
of the investment opportunity.

Question

You are considering an investment in a tree farm. Trees grow each year by the following factors:  The price of lumber follows a binomial lattice with  0. The interest rate (risk-free) is constant
at 6%. It costs $2 million each year, payable at the beginning of the year, to lease the forest land. The initial value
of the trees is $5 million (assuming they were harvested immediately). You can cut the trees at the end of any
year and then not pay rent after that. With rent of $2 million per year, find the best cutting policy and the value
of the investment opportunity.

Quizplus · Accepted Answer

The Answer is

You Are Considering an Investment in a Tree Farm