Question
Western Timber Company Western Timber Company acquires a tract of land on long-term lease and a lumber concession permitting it to cut equal quantities of
Western Timber Company
Western Timber Company acquires a tract of land on long-term lease and a lumber concession permitting it to cut equal quantities of timber (assume all in one big cutting at the end of each year) for ten years, but it must return the land to the government at the end of ten years with at least half a million cubic feet of timber standing. Currently, there are a million cubic feet of standing timber, and it is estimated that the forest grows at ten per cent per year.
Assuming that the timber can be sold for $100/cu. ft, and that the relevant discount rate for Western Timber is 6% for the first 6 years, and 8% thereafter, if it does the best it can for itself, what is the present value of future cash flows of Western Timber Company?
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