A company owns a tract of timber that will keep growing for a number of years.It calculates that the timber's value less the cost of harvesting is currently $50,000 and that this figure will grow by 10% in the next year and by 5% in the following year.If the cost of capital is 8%,when should the company harvest the timber?
A) today.
B) year 1.
C) year 2.
D) harvest a third of the timber each year.

Question

Quizplus · Accepted Answer

If harvested in year 1, the timber will have an NPV in year 1 of $50,000 × 1.10 = $55,000, and an NPV today of $55,000 / 1.08 = $50,926If harvested in year 2, it will have an NPV is year 2 of $55,000 × 1.05 = $57,750 and an NPV today of $57,750 / 1.08² = $49,511

A Company Owns a Tract of Timber That Will Keep