The timber rights to a tract of forest can be purchased for $220,000. The harvesting agreement would allow 25% of the timber to be cut in each of the first, second, fourth, and fifth years. The purchaser of the timber rights would be required to replant, at its expense, the logged areas in Years 3 and 6. Arrowsmith Lumber calculates that its profit in each of the four cutting years would be $90,000 and that the cost of replanting the harvested areas in each of Years 3 and 6 would be $30,000. Its cost of capital is 14%. At what price would Arrowsmith Lumber be willing to purchase the timber rights if it requires a return on investment of 15%?

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The Answer of The timber rights to a tract of forest can be purchased for $220,000. The harvesting agreement would allow 25% of the timber to be cut in each of the first, second, fourth, and fifth years. The purchaser of the timber rights would be required to replant, at its expense, the logged areas in Years 3 and 6. Arrowsmith Lumber calculates that its profit in each of the four cutting years would be $90,000 and that the cost of replanting the harvested areas in each of Years 3 and 6 would be $30,000. Its cost of capital is 14%. At what price would Arrowsmith Lumber be willing to purchase the timber rights if it requires a return on investment of 15%?

The Timber Rights to a Tract of Forest Can Be