Syllabus

FNR 407 Forest Economics

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) Hoover

203 FORS

billh@purdue.edu

(765) 496-0077 office

(765) 743-4120 home

(765) 404-7432 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 e-mail 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 B-C 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:   Forest Resource Economics and Finance, W. David Klemperer, McGraw-Hill, Inc. 1996

 

Self-Review 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

Introduction

Mastery Concepts

 

 

 

 

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 

Unique Aspects PP

 

 

 

 

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

Spreadsheet

Handout

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. 20-43, 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. 20-31,

Microecon PP

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)

Handout

 

 

 

 

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. 31-46

Microecon PP

Exercise 2 (Due February 8)

 

 

 

 

10 W

Feb. 3

Review of microeconomics: Supply-Demand 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. 46-55

S&D Equilibrium PP

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)

Handout

Spreadsheet

 

 

 

 

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 long-term timber production processes.

Assign: Text Ch. 4

Capital PP

Exercise 4, Ch. 4, Text 4-1 to 4-19, 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)

Handout

 

 

 

 

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

Inflation Adjusted DCF

Exercise 5, Ch. 5, Problems 5-1 to 5-10 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

Inflation Adjusted DCF

 

 

 

 

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)

Handout,

 

 

 

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 

SEV PP

Exercise 6, Ch 7, Problems 7-1 to 7-7  (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 

Economics of Forestland PP

Exercise 7, Ch 7, Problems 7-8 to 7-11 (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)

Handout  Excel Shell

Economics of Indiana Forestland PP

 

 

 

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 

Economics of Forestland PP

 

 

 

 

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

Past Examinations: 2007, 2006, 2005, 2004

 

 

 

 

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,

Capital Budgeting PP

Exercise 8 , Ch. 6, Problems 6-1 to 6-10 (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

Timber S&D PP

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

Timber S&D PP

 

 

 

 

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 e-mail.

 

 

 

 

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

Introduction to Taxes PP

 

 

 

 

31 W  

March 30

Economic Aspects of Taxation

 

 

Objective: Understand the basic features of the Federal Income Tax system

Assign: Text Ch. 9

Introduction to Taxes PP

Exercise 10, Ch 9, Problems 9-1 to 9-10 (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 e-mail.

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

After-Tax NPV and IRR

 

 

Objective: Be able to conduct after-tax 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

Risk Analysis PP

Exercise 11, Ch 10, Problems 10-1 to 10-10 (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

Risk Analysis PP

 

 

 

 

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

 Valuation & Appraisal PP

Exercise 12, Ch 11, Problems 11-1 through 11-12 (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

Valuation & Appraisal PP

 

 

 

 

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.

Assign: Text Ch. 11

Valuation & Appraisal PP

 

 

 

 

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

Past final examinations: 2007, 2006, 2004, 2003, 2002