Name: ______

FNR 407 Final Examination

May 3, 2010,

216 FORS

All questions are 4 points each

  1. Economists frequently use the word “efficient.” What broad concept are economists referring to when they talk about “efficiency”? Why should it matter to everyonewhether or not resources (money, natural resources, time) are used “efficiently”? (A complete amplified response is needed for full credit.)
  1. Financial maturity is a marginal analysis technique used to assist in determining when a tree should be harvested in a single-tree selection system. How would you explain the concept of financial maturity to a forest landowner?
  1. A forester is marking an uneven-aged stand of timber by selecting individual trees for harvest. She selects crop trees for harvest based on their financial maturity. The landowner has anMAR of 8%. If a tree has a current liquidation value of $300, and is projected to have a value of $800 in ten years, when the next harvest will be marked, should this tree definitely be included in the sale or not?(Show your work. A yes or no answer is not adequate.)
  1. Give a specific example of a capital budgeting decision that demonstrates why sunk costs don’t matter.
  1. What are the relationships among NPV, IRR and MAR?
  1. Assume you are a logger who just acquired cutting rights to a stand of timber. The contract allows you to cut any trees you want since the land is being converted to another use. The contract requires you to pay the landowner $10 per cord (stumpage fee) for each cord you harvest. Your estimate of all the marginal (variable) cost to harvest trees other than the stumpage feeand put the wood on the landing in the woods is as follows,

DBH / Marginal cost per cord
20 / 10.00
18 / 15.00
16 / 22.50
14 / 32.00
12 / 43.00
10 / 58.00
8 / 70.00
6 / 100.00
4 / 150.00

You must advise your logging crew about how small a tree cut. If the price you receive for pulpwood is $30 per cord picked up at the landing (where logs are piled ready for hauling to mill), what is the smallest size tree that should be cut?

  1. The NPV at the end of the 30th year, the optimal rotation for the stand, is $20,050. What is the WPL∞(SEV) for this timber management regimefor an investor with an MAR of 5%? Show the formula and do the calculation.
  1. You are thinking about starting a Christmas tree plantation as a sideline business. The cost to buy the land and other fixed costs total $50,000.You estimate that the cost to plant, trim, spray, harvest and sell each tree after 6 years will be $5.00 per tree. You estimate that the trees will sell for $ 15.00 each.

Ignoring the fact that you have to wait for 6 years to sell the first tree, how many trees would you have to sell to break even on this operation?

  1. A monopolist estimates that the demand for the product it manufactures can be expressed as Qd = 10,000 – 50P. This means that the marginal revenue curve is MR = 10,000 – 100P. The company analyst determines that the level of output where MC and MR are equal is 2,500 units. What price should this monopolist charge for its product?
  1. In the context of discounted cash flow analysis, such as net present value, what is the meaning of “opportunity cost” and how is this cost accounted for in the calculation of net present value?
  1. Why is the analysis of comparable salesalmost always used to make “appraisals” but is rarely used to conduct valuations?
  1. Explain why the portion of the marginal cost curve for a production process that lies below the average variable cost curve is not considered part of the supply curve for a firm using that production process.
  1. If the NPV of an investment alternative is calculated using a real interest rate and all the cash flows are expressed in real terms (adjusted for inflation), what single additional step would be needed to determine the after-tax NPV?
  1. You learned that a tree is both the product and the machine. Are the implications of this fact (a) more important, or (b) less important for Weyerhaeuser Corp. that owns over 2 million acres of timberland than it is for the typical tree farmer that owns less than 100 acres?
  1. Write below the general formula for NPV with t – index on time, n – number of time period, i – discount rate. Be specific!
  1. Stumpage owners are said to have a “reservation price” for their timber. What does this term refer to and how could a timber owner’s reservation price be estimated by a timber buyer?

17. If the MAR for a decision maker is 5% and the net present value is $600 when all expenditures and revenues are discounted at 5%, should the decision maker accept the project? Explain your yes/no answer.

  1. Your 105 year-old great grandfather tells you that his attorney is in the process of finalizing the documents to give you his tree farm. He’d like you to meet with him and his attorney next week. Your great grandfather inherited it from your grandfather 6 months ago at which time it was worth $2.3 million. Your grandfather paid $20,000 for the tree farm 50 years ago. (Note that great-grandpa out lived grandpa.)
  1. Do you have any reservations about taking this gift?
  1. If you sold the tree farm for $2.5 million a month after you received it as a gift approximately how much would your gain be for income tax purposes? (Assume that timberland values were stable over this 6-month period.)

19.If the nominal rate of interest (i) is 8.0% and the rate of inflation (f) is 3%, what is the real rate of interest rate (r)to 2 decimal places, i.e (0.00%)?

  1. Why isn’t the supply curve for timber (stumpage) in a defined geographical area based on the total inventory of timber for that region?
  1. If Ep > |1| should the unit price be (a) increased, or (b) decreased to increase total revenue, TR, which you’ll recall equals P x Q?
  1. In the table below check the correct box

Benefit-Cost Ratio Value is / NPV = 0 / NPV > 0 / NPV < 0
< 1
> 1
= 1
  1. The WPL1is estimated to equal $1,200 per acre at the optimal rotation length of t = 35 years and the stand will not be held past the optimal rotation. If the holding value at time “t = x” is estimated to be $1,000 per acre is “x” (a) > 35 years, (b) = 35 years, or < 35 years?
  1. If a tree farmer’s ordinary income tax rate is 32% in 2010 and their deductible expenditures total $10,000 in 2010, what is their total after-tax expenditure?
  1. A tree farmer sells 100 MBF of timber for $100,000 in 2010. Their adjusted basis in the timber that year is $200,000 and the total volume of timber on the tree farm is 200 MBF with the 100 MBF sold included. What is the amount of the capital gain on this sale?

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