Question

Suppose that your site has a current harvest value of $9,000 (if harvested now) or a harvest value of 16,000 if harvested in 10 years, or a harvest value of $25,000 if harvested in 20 years. Annual administrative costs are $10/acre as in problem 4. At harvest, you will install the management regime from problem 4 at the time of harvest. Which option (now, 10 years hence, or 20 years hence) produces the highest NPV. Use a discount rate of 4% here too. Answer: $16,435.57 $ $15,751.12 and $14,667.27

Answer 1

Case 1: Harvest Now

The harvest value is $9000. Since this is the value at the current time period, it is equal to the Present Value or PV.

thus, NPV₁=$9000

Case 2: Harvest 10 years hence

Harvest Value of $16000. At a discount rate of 4%, Present Value = 16000/(1+0.04)¹⁰= $10810.81

thus, NPV₂=$10810.81

Case 3: Hravest 20 years hence

Harvest Value of $25000. At a discount rate of 4%, Present Value = 25000/(1+0.04)²⁰ = $11415.52

thus, NPV₃=$11415.52.

Since NPV₃ is the highest, we must harvest 20 years from now.