Question 2:

Paper Stuff Ltd. has just planted pine trees at a cost of $12,000 per hectare on 500 hectares of land,

which is purchased for $400,000. The trees are expected to grow rapidly and the company’s

estimates of the net future value of the cut timber are:



Time of harvest end of year: Net future value ($ per hectare):

2 17320

3 20000

4 22360

5 24495

6 26450



The required rate of return is 10 percent per annum and taxes can be ignored.



a. Calculate the optimum time to harvest the crop of trees. Assume that the value of the

cleared land increases at a rate of 10 percent per annum.



b. Estimate the net present value of the project, assuming sale of the land after the trees are

harvested. Note any assumptions you make.