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Gump Forest Products has acquired rights to a tract of land on which an even-aged...

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Accounting

Gump Forest Products has acquired rights to a tract of land on which an even-aged stand of oak trees is growing. As oak trees need no tending, Gump needs only to wait until the right time to harvest, by clear cutting, the stand. The volume of timber increases with time, according to: equation The price of a unit of timber from a tree at least 50-years old is $1 (buyers will not purchase 'younger' wood), and is expected to remain so for all time. The annual interest rate which Gump can earn on alternate investments is 2.02%, which translates into an instantaneous interest rate, , of 2%, or .02. Suppose that the cost of cutting is NOT TRIVIAL--it is $11,000 (independent of of the age of the stand, and also independent of the volume of timber). Continue to assume that Gump plans to abandon the land on which the trees are growing after the initial harvest. How long should it wait before cutting, if its goal is to maximize the present value of the stand (i.e., at what age (t) should the trees be cut)?

answers:

t at least 85 years but not more than 94 years

2)

t at least 76 years but not more than 84 years

3)

t < 75 years

4)

t at least 105

5)

t at least 95 years but not more than 104 years

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