(A) Describethe Practical Meaning of SEV (WPL )

NAME: ______

FNR 407

Examination No. 3, 2010

(9)1. The classical term is “soilexpectation value” (SEV) or Faustman formula. Klemperer, the textbook author, prefers the term “willingness to pay for land,” (WPL∞).

(a) describethe practical meaning of SEV (WPL∞) ,

(b) howis SEV (WPL∞) calculated, and

(5)2.What is meant by the statement that “an expenditure occurs in year 0”? How does it affect the application of the compound interest formulasfor the present or future value an annuity or series of periodic payment?

(5)3.What is the formula for net present value?

(5)4.If you are asked to estimate WPL∞ (SEV) in real terms (deflated values) on a before-tax basis, what is the easiest way to do the calculations?

(5)5.If you are asked to estimate WPL∞ (SEV) in real terms on an after-tax basis, what adjustment has to made to the procedure used to estimate it on a before-tax basis?

(5)6.If the minimum acceptable rate of return (MAR) for a decision maker is 6% and the net present value is zero when all expenditures and revenues are discounted at 4%, should the decision maker accept the project? Explain your yes/no answer.

(5)7.How is the basis in timber recovered for tax purposes?

(9)8.The gain realized from the disposal, usually by selling, of an asset is the sales revenue reduced by the “basis” of the asset. What does the term “basis” refer to? What is source of the “original basis” of assets that are acquired by,

(a) purchase

(b) inheritance

(5)9.The state and local property tax is an “ad valorem” tax. Why is this form of taxation biased against timber production?

(6)10.Mr. Jones owns 120 acres of well stocked timberland in Indiana. He is moving to New York City and wants to sell the property instead of trying to manage it from New York. Being a financial guru he asks for your adviceon how to determine the price he should ask for the property given that he wants to maximize his financial position. What advice would you give him? (Be specific)

(6)11.What are the relationships among financial maturity, optimal rotation, and forest value growth percent (fvg%)?

(5)12.If the rate of inflation (f) is 4% and the real interest rate (r) is 3%, what is the nominal interest rate (i) ?

(5)13.If the net present value of one even-aged rotation is $5,000 per acre at the optimal rotation age of 35 years for an investor with a MAR of 5%, what is the SEV?

(3 points for setting up the formula correctly, 1 point for the correct numerical answer.)

(5)14.What decision is made by calculating holding value and what basic economic principle that we focused on at the beginning of this course is holding value based on?

(5)15.In 1990 a tract of loblolly pine has a timber value of $120,000 and the land is worth $130,000. In 2010 the value of the timber is $200,000and the land is worth $150,000. What is the forest value growth percent (fvg%) over this period.

(5)16.Under what conditions could the proceeds from the sale of timber on the stump be subject to an income tax of almost 50%?

(5)17.If a family buys a tract of forest for $100,000 and the fair market value of the land is $50,000 and the fair market value of the timber is $100,000 on the date of purchase, what is the original cost basis of the timber?

(4)18.A family pays $1,800 per acre for forest land even though a consulting forester tells them that the NPV as of the year of purchase, based on projected timber and other income, property taxes, and management costs over the next 40 years is only $1,100 per care. What might we conclude about what the family values?