7. You work for a paper company. Your company grows its own trees from which to

Question

7. You work for a paper company. Your company grows its own trees from which to manufacture paper products. Your boss stopped by today and ask you when to cut down the trees and make paper from them. Assume that the cost of converting trees to paper is teto Trees can produce 3,000 reams of paper today. As trees grow each year, you get 1,00 reams more each year. For example, you will get 4,000 reams of paper in year 1, 5,000 ream of paper in year 2 and so on. The company's discount rate is 17% and the price of paper is ov ream today. The inflation is expected to be 5% per year over the next 10 years when hould you cut down the trees and make paper? (9)

Explanation / Answer

If we cut trees and make paper today:

Benefit = 3000*30 = $90,000

If after 1 year, Revised price per ream would be 30*1.05 = 31.5

Dicounting factor = 17%

Therefore, Present Value of Benefits = 4000*31.5/(1.17) = $107692

Similiarly, After 2 years = 5000*30*1.05*1.05/(1.17)(1.17)

= 120,809

After 3 years = 6000*30*(1.05)3/(1.17)3

= 130,102

After 4 years, 7000*30*(1.05)4/(1.17)4

=136,218

After 5 years, 8000*30*(1.05)5/(1.17)5

= 139,710

After 6 years, 9000*30*(1.05)6/(1.17)6

= 141054

After 7 years, 10000*30*(1.05)7/(1.17)7

=140652

Now, since the present value has started declining 7th year onwards, it will be even lesser in the coming years

Hence, we should cut down the trees after 6 years

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