You are given the following net future values for harvesting trees from a plot of forestland.(This is a one-time harvest.) $\begin{array} { l c c c c c c }
\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Net Future Value } & 100 & 125 & 150 & 175 & 195 & 210
\end{array}$ If the cost of capital is 15 percent, calculate the optimal year to harvest.
A)Year 1
B)Year 2
C)Year 3
D)Year 4

Question

You are given the following net future values for harvesting trees from a plot of forestland.(This is a one-time harvest.) $\begin{array} { l c c c c c c } 
\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Net Future Value } & 100 & 125 & 150 & 175 & 195 & 210
\end{array}$ If the cost of capital is 15 percent, calculate the optimal year to harvest.
A)Year 1
B)Year 2
C)Year 3
D)Year 4

Quizplus · Accepted Answer

To determine the optimal year to harvest, we need to calculate the present value of each year's net future value using the cost of capital of 15 percent.

Year 1: 
PV = 125/(1.15^1) = 108.70

Year 2: 
PV = 150/(1.15^2) = 118.70

Year 3: 
PV = 175/(1.15^3) = 128.92

Year 4: 
PV = 195/(1.15^4) = 129.34

Year 5: 
PV = 210/(1.15^5) = 129.09

The maximum present value is for year 3, with a PV of $128.92. Therefore, the optimal year to harvest is year 3.