Syllabus
FNR 407
Spring 2016, January 11 to May 6
Monday and Wednesday 11:30 – 12:20 AM, PFEN 203
Friday, 9:30  11:20 AM, PFEN 202
Instructor: William L. (Bill)
203 FORS
billh@purdue.edu
(765) 4960077
office
(765) 7434120 home
(765) 4047432 cell
Office
Hours: There is nothing more important to
me than your success in this course. Thus, if I'm in my office when you stop by
and I'm not with someone else, I'll be glad to help you. I want to establish
regular office hours M, W, F based on you’re
availability. But, it’s best to check on
my availability for a specific day and time by email or phone.
Course
Objectives:
Survey the unique economic
characteristics of forests and timber and how these affect decisions about the
use and management of forests. The economic and financial aspects of basic
forest management decisions will be applied to a case study.
Prerequisite:
AGEC 20300 Minimum Grade of D; or Undergraduate level AGEC 20400 Minimum Grade
of D; or Undergraduate level ECON 25100
Minimum Grade of D; or Undergraduate level ECON E2010 Minimum Grade of D; or
Undergraduate level ECON E1030 Minimum Grade of D
Instructional
Material:
1. Notes
by William L. Hoover and Gerald Shively
http://www.agecon.purdue.edu/staff/shively/courses/AGEC406/index.htm
a. Outline of Microeconomics
b.
Overview of BC Analysis
c.
Basic Concepts in Economic Theory
2.
Powerpoint presentations are linked in syllabus below for the day they
are used in class.
3.
Textbook:
SelfReview
of Basic Concepts:
In
addition to the basic algebra you already know we will use summation notation
and differential calculus. Please review summation notation at one of the many
website available: http://davidmlane/hyperstat/A46748.htm
and http://www.math.ucdavis.edu/~kouba/CalcTwoDIRECTORY/summationdirectory/Summation.html
Pull out your calculus textbook if
you need to review differential calculus.
Computer Software:
We will make extensive use of EXCEL
to do financial calculations. If you are not already proficient with EXCEL
please practice. One of the major challenges will be the entry of formulas. Use
HELP menu to learn how to enter complex formulas.
Case Study:
The case study we will work on
throughout the semester is Woody Barton’s Tree Farm. You will analyze the revenue and expenditure
stream for Woody's investment since he made the first purchase in 1962 to
estimate the net present value (NPV), internal rate of return (IRR), and soil
expectation value (SEV) for his investment.
Quizzes:
There will be approximately 10
unannounced quizzes focusing on the basic concepts you are expected to master,
i.e. thoroughly understand and be able to apply. The purpose of the quizzes is
to motivate you to keep up with the material, but also to allow me to assess
how many of you have mastered the basic concepts. You will get quiz questions
dealing with these basic concepts until essentially everyone in the class
responds correctly.
Examinations and Final:
There will be three examinations and
a comprehensive final during finals week. Exams and finals given in the last
several years are linked in the syllabus below. You should use these as study
guides and if you're not confident that you can answer the questions you should
seek assistance. Like the quizzes, the exams and final test your
understanding of basic concepts, not minutia found in the textbook or other
materials used in this course.
Exercises:
Without question the best way to
understand the basic concepts you will be expected to master is to apply them.
This will be accomplished with 22 exercises, 10 of which will be completed in
the weekly laboratory periods. A list of these with due dates is in
a linked document, and they are also in the syllabus table below. The
primary purpose of these exercises is to give you a mechanism for understanding
the concepts, not to judge and grade your understanding of them. Thus,
you are encouraged to work on the exercises collaboratively and to seek help
from Prof. Hoover and the TA. Getting behind on completing the exercises is
deadly to your success in this course.
Mastery Concepts:
The application of economic and
financial concepts requires you to solve problems in ways that may be new to
you. Some basic concepts underlie the approaches used. I have attempted to
summarize these. Almost everything we'll do in this course builds on these
concepts and they will be the focus of quiz questions. The summary of these
concepts is in the linked
document.
Grading:
Grade
Makeup
Examinations, 3 each 35%
Final examination 15%
Quizzes 15%
Exercises 35%
Total 100%
SYLLABUS

Date 
Topic 
Assignment 
1
M 
Jan. 11 
(1) Overview of course
requirements, procedures, and grading (2) Summarize mastery concepts (3) Summarize the unique aspects
of forests from an economic perspective 



Objective: Become familiar with what's different about forestland and
timber production from an economic standpoint 
Text:
Chapter 2 




2
W 
Jan.
13 
Unique aspects of forests and
timber 



Objective: Become familiar with what's different about forestland and
timber production from an economic standpoint. Introduce the concept of
supply and demand (market) analysis 
Text:
Chapter 2 




3
F 
Jan.
15 
Laboratory  Excel spreadsheet and summation notation 



Objective: Become skilled in doing calculations with Excel and
applying summation notation. 
Lab
Exercise #1 – Use of spreadsheet Due at end of class, not scored 




M 
Jan
18 
MLK Day, No class 





4
W 
Jan.20 
Analytical Tools  Marginal
Analysis 



Objective: Learn the basic elements of marginal analysis (MA) 
Assign: Text p. 2043, Analytical Tools PP 




5
F 
Jan.
22 
Laboratory  Conduct simple
marginal analysis 



Objective: Learn to conduct simple marginal analysis 
Lab
Exercise #2  Killmore Wild Game Company Killmore WGCo (Due January 29) 




6
M 
Jan
25 
Analytical Tools  Discounted Cash
Flow (DCF) 



Objective: Have a working knowledge of the use of net present value ( NPV) and internal rate of return (IRR) to make
investment decisions. 
Assign: Text Chapter 4 Analytical Tools PP 
7
W 
Jan
27 
Review of microeconomics: Theory
of demand 



Objective:
Review the meaning of a demand curve, the price elasticity of demand, and
movements along and shifts in demand. 
Assign:
Text p. 2031, Exercise
1 (Due February 3) 




8
F 
Jan.
29 
Laboratory 
Conduct more complicated marginal analysis 

Objective: Conduct marginal analysis requiring adjustments for tree
and log volume 
Lab
Exercise #3  Marginal size tree to harvest (Due February 5) 





9
M 
Feb.
1 
Review of microeconomics: Theory
of supply 



Objective:
Review the meaning of a supply curve and how it is derived. Also, learn how
to add individual producer's curves to obtain market supply curves. 
Assign:
Text p. 3146 Exercise 2 (Due February 8) 




10 W

Feb.
3 
Review of microeconomics: SupplyDemand equilibrium 



Objective: Combine demand and supply curves to obtain market
equilibrium price and quantity in the case of (1) a perfectly competitive
market structure, and (2) a monopolistic market structure 
Assign:
Text p. 4655 Exercise 3 (Due February 10) 




11
F 
Feb.
5 
Laboratory: NPV
and IRR 

Objective: Use Excel to calculate net present value (NPV), use Goal
Seek tool to find internal rate of return (IRR), and conduct sensitivity
analysis on important variables. 
Lab
Exercise #4  NPV, IRR, and Sensitivity Analysis (Due February 12) 





12 M

Feb.
8 
Examination 1 Review
session scheduled on request 
Past
Examinations: 2007, 2006, 2005, 2004, 2003, 2002 




13 W

Feb.
10 
Forests as Capital 



Objective: Interpret the implications of the time value of money,
opportunity cost, and carry out basic calculations for longterm timber
production processes. 
Assign: Text Ch. 4 Exercise 4, Ch. 4, Text 41 to 419, Complete in Excel and submit
file (Due February 17) 




14
F 
Feb.
12 
Laboratory  Financial maturity 

Objective:
Determine when a tree should be
harvested based on financial criteria and compare to biological maturity. 
Lab
Exercise #5  Financial maturity of hardwood trees (Due February 19) 





15 M

Feb.
15 
Inflation adjusted DCF 



Objective: Interpret measures of inflation. Conduct discounted cash
flow analysis, NPV and IRR with discount rate, revenues, and expenses
adjusted for inflation

Text Ch. 5 Exercise 5, Ch. 5, Problems
51 to 510 in text (Due February 22) 




16 W

Feb.
17 
Inflation adjusted DCF 



Objective: Conduct discounted cash flow analysis, NPV and IRR with
discount rate, revenues, and expenses adjusted for inflation 
Text Ch. 5 




17
F 
Feb.
19 
Laboratory 
Inflation adjusted NPV and IRR 

Objective: Use Excel to calculate NPV with adjustments for inflation.

Lab
Exercise #6  Inflation adjusted NPV and IRR calculations (Due February 26) 





18 M

Feb.
22 
Soil Expectation Value (SEV) also
called Willingness to Pay for Land (WPL) 

Objective: Apply the concept of economic rent to determination of
value of land used for timber production 
Assign: Text Ch. 7 Exercise 6, Ch 7, Problems 71 to 77 (Due February 29) 





19 W

Feb.
24 
Economics of Forestland 

Objective: Use economic rent and SEV for alternative land uses to
estimate how land will be used 
Assign: Text Ch. 7 Exercise 7, Ch 7, Problems 78 to 711 (Due March 2) 




20
F 
Feb.
26 
Economics of Indiana Forestland 

Objective: Calculate WPL for Indiana forestland 
Lab
Exercise #7  Calculate WPL for Indiana Forestland (Due
March 11) 





21M 
Feb. 29 
Economics of Row Crops 

Objective:
Use cash rent data to determine
WPL for cropland and compare to forestland 
Row Crops PP 





22 W

March
2 
Holding Value of Forestland 



Objective: Determine when the current use of land should be changed or
current use continued 
Assign: Text Ch. 7 




23
F 
March
4 
Holding and Liquidation Value of Indiana
Forestland 
Lab
Exercise #7, Continued (Due March 11) 


Objective: Determine when the current use of land should be changed
or current use continued 





24 M

March
7 
Examination
2 Review
session schedule on request 





25 W

March
9 
Capital budgeting 



Objective: Become familiar with procedures used to allocate available
capital to projects by comparing returns from each project 
Assign: Text Ch. 6, Exercise 8 , Ch. 6, Problems 61 to 610 (Due March 23) 




26
F 
March
11 
Capital budgeting 



Objective: Use NPV and IRR to select among competing investment
alternatives in the management of hardwood stands 
Lab
Exercise #8  Alternative hardwood plantation management options (Due March 25) Handout


Spring Break 






27 M

March
21 
Timber Demand and Supply 



Objective:
Know how demand and supply curves for timber are determined in the long and short
run; the relationship between timber inventory and timber supply; and how
supply and demand are balanced.

Assign: Text Ch. 12 Exercise 9, Ch. 12,
Problems 5, 6, 7, 8, 10 (Due March 30) 




28 W

March
23 
Timber Demand and Supply 
Assign: Text Ch. 12 




29
F 
March
25 
Laboratory 
Introduce case study 



Objective: Become familiar with the inventory and financial data
provided by Mr. Barton 
Lab.
Exercise #9  Introduction of Case Study Handout and files send by email. 




30 M

March
28 
Introduction to Taxes 



Objective: Gain a basic understanding of the range of federal,
state, and local taxes affecting land use and management decisions 





31 W

March
30 
Economic Aspects of Taxation 



Objective: Understand the basic features of the Federal Income Tax
system 
Assign: Text Ch. 9 Exercise 10, Ch 9, Problems 91 to 910 (Due April 6) 




32
F 
April
1 
Work on Case Study 



Objective: Calculate NPV and IRR of revenues and expenses since Mr.
Barton purchased the property 
Lab
Exercise #9 Handout and files sent by email. Part
1. Historical NPV and IRR (Due April 10)





33 M

April
4 
Examination 3 Review
session scheduled on request 
Past examinations: 2007, 2006, 2005, 2004 




34 W

April
6 
AfterTax NPV and IRR 



Objective: Be able to conduct aftertax DCF and understand the impact
of taxes on soil expectation value (SEV) 
Assign: Text Ch. 9 Federal Income Tax PP 




35
F 
April
8 
Work on Case Study 

Objective: Predict the NPV and IRR for Mr. Barton's investment over
the next 30 years based on growth and stocking data. 
Lab
Exercise #10 Predicted
NPV and IRR 





36 M

April
11 
Risk Analysis 



Objective: Learn the sources of risk in timber investment and how to
adjust NPV and IRR for risk 
Assign: Text Ch. 10 Exercise 11, Ch 10, Problems 101 to 1010 (Due April 18) 




37 W

April
13 
Risk Analysis 



Objective: Learn the sources of risk in timber investments and how to
adjust NPV and IRR for risk 
Text Ch. 10 




38
F 
April
15 
Work on WBTF Case 



Objective: xx Predict the NPV and IRR for Mr. Barton's investment
over the next 30 years based on growth and stocking data. 
Lab
Exercise #10 Predicted
NPV and IRR 




39 M

April
18 
Forest Valuation and Appraisal 



Objective: Be able to distinguish between valuation and appraisal,
and how fair market values are estimated for forestland and timber. 
Assign: Text Ch. 11 Exercise 12, Ch 11, Problems 111 through 1112 (Due April 25) 




40 W

April
20 
Forest Valuation and Appraisal 



Objective: Be able to distinguish between valuation and appraisal,
and how fair market values are estimated for forestland and timber. 
Assign: Text Ch. 11 




41
F 
April
22 
Work on WBTF Case 



Objective: Predict the NPV and IRR for Mr. Barton's investment over
the next 30 years based on growth and stocking data. 
Lab
Exercise #10 Continued (Due April 29) 




42 M

April
25 
Forest Valuation and Appraisal 



Objective: Be able to distinguish between valuation and appraisal,
and how fair market values are estimated for forestland and timber. 





43 W

April
27 
Introduce FNR 409 



Objective: Gain an understanding of
how the concepts you have mastered in this course will be applied in
FNR 409, Timber Management 





44
F 
April
29 
Review for final 






Week
of May 2 
Final Examination 