Syllabus (revised 3/17/2013)

FNR 407 Forest Economics

Spring 2013, January 7 to May 4

Monday and Wednesday 9:30 AM, FORS 216

Friday, 9:30 - 11:20 AM, SC 246

Instructor: William L. (Bill) Hoover

108 FORS

billh@purdue.edu

(765) 494-3580 (office)

Teaching Assistant: Tamara Benjamin, PhD

1-422 LILY

tamara17@purdue.edu

(765) 496-1930 (office)

 

Course Administration

Office Hours: There is nothing more important to us 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. But be aware that I am responsible for educational programs off campus that take me away from my office. Thus, it's best to check on my availability for a specific day and time by e-mail or phone. I keep my calendar up-to-date and my assistant Diana Evans in FORS 107, 494-3583, can check it for you.

 

Campus Emergency: In the event of a major campus emergency, course requirements, deadlines and grading percentages are subject to changes that may be necessitated by a revised semester calendar or other circumstances. I will inform you by e-mail as soon as adjustments become necessary. You can also contact me as per above.

Personal Emergency: There are more important events in our lifes than a few classes. If you need to be gone for more than one period in a row please contact me to arrange make-up procedures for learning the material missed.

 

Learning Objectives: Students completing this course will be able to apply the basic techniques of economic and financial analysis to real world problems they may encounter in their careers and personal life. A survey is provided of the unique economic characteristics of forests and timber production and how these affect decisions about their use and management. The focus is on application of problem solving techniques and technical writing.

Prerequisite:  FNR/AGEC 406 Natural Resource and Environmental Economics , or permission of the instructor

 

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

      This review material will provide you with another presentation of the basic concepts applied in class.

 

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. Available at local bookstores, or Amazon.com for as little as $38.00 ( http://www.amazon.com/s/ref=nb_sb_ss_i_0_15?url=search-alias%3Daps&field-keywords=forest+resource+economics+and+finance&sprefix=Forest+Resource%2Caps%2C209)

 

4.       Mastery Concepts - These are the core concepts that must be mastered to pass the course. At least one will apply to every aspect of the course. They will be included in quizes in some form until everyone in the class understands them. They are presented in a handout.

Self-Review of Basic Concepts:

            In addition to the basic algebra you already know we will use summation notation and differential calculus. The first lab exercise will deal with applying summation notation in EXCEL Spreadsheets. But, please review summation notation at, http://www.math.ucdavis.edu/~kouba/CalcTwoDIRECTORY/summationdirectory/Summation.html

 

                Pull out your calculus textbook if you need to review differential calculus, focus on first and second derivatives .

 

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.

 

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 seek assistance.  Like the quizzes, the exams and final will test your understanding of basic concepts, not minutia found in the textbook or other materials used in this course.

Academic Dishonesty:

Purdue prohibits "dishonesty in connection with any University activity. Cheating, plagiarism, or knowingly furnishing false information to the University are examples of dishonesty." [Part 5, Section III-B-2-a, University Regulations] Furthermore, the University Senate has stipulated that "the commitment of acts of cheating, lying, and deceit in any of their diverse forms (such as the use of substitutes for taking examinations, the use of illegal cribs, plagiarism, and copying during examinations) is dishonest and must not be tolerated. Moreover, knowingly to aid and abet, directly or indirectly, other parties in committing dishonest acts is in itself dishonest." [University Senate Document 72-18, December 15, 1972] SEE:

http://www.purdue.edu/odos/aboutodos/academicintegrity.php

 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 exercises completed in the weekly laboratory period. A list of these with due dates is 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 or Benjamin. 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 summarized these as Mastery Concepts. Almost everything we'll do in this course builds on these concepts and they will be the focus of quiz questions.

Technical Paper: Due May 3, Friday, by 5:00 PM

You are required to submit a technical paper demonstrating how economic tools can be applied to a real world problem. Requirements:

(1) Select an industry or sector of the economy for which you have an interest.

(2) Confirm that articles from trade journals or other sources are accessible to you,

(3) Confirm that economic data is available to you ( Google searches will provide access to the US Dept. of Commerce and other data bases).

(4) During the course use these sources to track the economic performance of your industry or sector and be prepared to provide summaries in class when called on.

(5) Complete a technical paper of at least 3,000 words that includes a description of the industry or sector, its role in the US and Global economies, factors driving the level of activity in the industry or sector, graphs showing activity in the industry or sector and the factors determining activity, your assessment of the current state of the industry or sector, and your outlook for the industry or sector going forward. Your paper must follow the editorial guidelines for the Northern J.of Applied Forestry: http://www.safnet.org/publications/northern/guideforauthors.cfm

Evaluation criteria for paper: There is no specific outline for all papers, but there is required content. Also, you are required to follow the editorial guidelines for SAF publications. These are referenced in the assignment. Content must include, (1) Statement of the issue or problem to be analyzed; (2) Analytical method(s) to be used, (3) Sources of information and information that would be useful but could not be found; (4) Information-data used; (5) Analysis; (6) Results; (7) Conclusions; (8) Literature cited.

Grading:

 

            Examinations, 3 each              35%

Final examination                    15%

Quizzes                                   15%

Technical Paper                       15%

Exercises                                 20%

            Total                          100%

 

                                                                 SYLLABUS

 

 

Date

Topic

Assignment

1 M

Jan.  7

(1) Overview of course requirements, procedures, and grading

(2) Introduce mastery concepts

(3) Introduce the concept of managerial economics and basic decision making steps.

 

 

Objective: Become familiar with problems that can be solved using economic approaches, and the basic tools of problem solving and economic analyses.

Text: Study Chapter 2

 

 

 

 

2 W

Jan. 9

Unique Characteristics of Forests and Timber

 

 

 

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

Text: Study Chapter 2

Power Point

 

 

 

 

3 F

Jan. 11

Laboratory - Excel spreadsheet and summation notation

 

 

 

Objective: Become skilled in doing calculations with Excel and translating formulas using summation notation into Excel calculations.

Lab Exercise #1 - Use of spreadsheet

Spreadsheet

Handout

Due at end of class, not scored

 

 

 

 

4 M

Jan 14

Analytical Tools - Marginal Analysis (Dr. Benjamin)

 

 

 

Objective: Learn the basic elements of marginal analysis.

Text: Study p. 20-43

Power Point  

 

 

 

5 W

Jan. 16

Analytical Tools - Discounted Cash Flow Analysis

 

 

Objective:Have a working knowledge of the use of net present value (NPV) and internal rate of return (IRR) to make investment decisions.

Text: p. 101-113

Power Point

 

 

 

 

6 F

Jan. 18

Laboratory - Conduct simple marginal analysis


 

 

Objective: Learn to conduct simple marginal analyses and interpret the results.

Lab Exercise #2 - Killmore Wild Game Company

Killmore WGCo (Due January 25 )

 

 

 

 

M

Jan.21

MLK Day, No class 

 

 

 

 

 

 

 

 

7 W

Jan 23

Review of Microeconomics - Theory of Demand

Text: p. 20-31

Power Point

NL Exer 1 (Due Jan. 30)

 

 

Objective: Review the meaning of a demand curve, the price elasticity of demand, and movements along ans shifts in demand.

 

8 F

Jan. 25

Laboratory - Conduct complicated marginal analysis

Lab exercise #3 - Marginal dbh for logging company to harvest for lump-sum and pay-as-cut contracts.

Marginal DBH to Harvest (Due Feb. 1)

Objective: Conduct marginal analysis requiring adjustments for tree and log volume

9 M

Jan 28

Review of Microeconomics - Theory of Supply (Dr. Benjamin)

Text: p. 31-46

Power Point

NL Exer 2 (Due Feb. 4)

 

 

Objective: Review the meaning of a supply curve and how it is derived. Also, learn how to add individual producers' curves to obtain market supply curve.

 

 

 

 

 

10W

Jan. 30

Review of microeconomics - Supply and Demand Equilibrium

Text: p. 46-55

Power Point

NL Exer 3 (Due Feb. 6)

 

 

 Objective: Combine demand and supply cureves to obtain market equilibrium price and quanityu in the cases of (1) a perfectly competitive market structure and (2) a monopolistic market structure.

 

 

 

 

 

 

11 F

Feb. 1

Laboratory: Discounted Cash Flow

-

-

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.

Text: Chapter 4

Lab Exercise #4 - NPV, IRR, and Sensitivity Analysis Handout   Spreadsheet  (Due Feb. 8 )

 

 

 

12 M

Feb. 4

Forests as Capital

 

 

 

Objective: Know the implications of the time value of money (assets generally), opportunity cost, and learn how to carryout basic calculations for long-term timber production processes.

Text: Chapter 4

NL Exer 4 - Chapter 4 problems 4-1, 4-3, 4-7, 4-9, 4-11, 4-13, 4-15, 4-17 (Answers are on p. 539 of text. Show your calculations). (Due Feb. 16) Interest Rate Formula Sheet, Examples, Plum Creek 10K

 

 

 

 

13 W      

Feb. 6

Examination 1

  Past Exams 20122011, 2010, 2009, 2008

Warning: Many questions in previous exams are no longer relevent

 

 

 

 

14 F

Feb. 8

Laboratory - Financial Maturity of Single Trees

 

  

 

Objective: Determine when a tree should be harvested based on financial criteria and compare to biological maturity.

Study: Financial Maturity Concepts

Lab Exercise #5 - Financial maturity of hardwood trees  (Due Feb. 22 ) Handout

 

 

 

 

15 M

Feb. 11

Return Exam and discuss in detail. Soil Expectation Value (SEV) also called Willingness to Pay for Land(WPL) (Dr. Benjamin)

 Text: Chapter 7, Power Point with Example , WPL-SEV Formula Example , Dr-Benjamin PP

 

 

 Apply the concept of economic rent to determination of the value of land used for timber production.

 NL Exer. 5, Chapter 7 problems 7-1, 7-3, 7-5, 7-7, 7-9, 7-10, 7-11 (Due Feb. 18)

 

 

 

 

16 W

 Feb. 13

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

Text: Chapter 7

 

 

 Learn how SEV from alternative land uses is a major factor determining land use

 

 

 

 

 

  17 F  

Feb. 15

Laboratory - Financial Maturity of Single Trees , continued

Lab. Exer. #5, Continued

Objective: Determine when a tree should be harvested based on financial criteria and compare to biological maturity.

(Due Feb. 22 )

 

 

 

 

18 M

Feb.18

Definition of inflation and its effects on decisions

  Text Ch. 5

 

 

Objective: Understand what inflation is, what causes it, and why it can lead to bad decisions.

 

NL Exer. 6, Chapter 5 problems 5-1, 5-3, 5-5, 5-7, 5-9, 5-11, 5-13, 5-15 (Due Feb. 27)

Power Point

 

 

 

19 W

Feb. 20

Inflation adjusted SEV, NPV, IRR

Text Ch. 5

 

 

Objective: Learn how to adjust cash flows to estimate inflation adjusted SEV, NPV, IRR

 

 

 

 20 F    

Feb. 22

Laboratory - Inflation adjusted NPV and IRR

 

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

Lab Exercise #6 - Inflation adjusted NPV and IRR calculations (Due March 1 )

Handout

 

 

 

 

21 M

Feb. 25

Market Equilibrium and Structure, Derived Demand for Inputs

 

 

 

Objective: Learn how markets balance the supply of and demand for a good or service in a highly competitive and a monopolistic market. Learn how the demand for logs is derived from the demand for lumber, and demand for logs determines demand for stumpage

Text: Ch. 2

 

 

 

 

 22 W   

 Feb. 27

Break-Even Analysis (Dr. Benjamin)

 

 

 

 

Power Point

Spreadsheet

 

 

 

 

23 F

March 1

 Economics of Indiana Forestland and Crop Land

 

 

 

Objective: Calculate WPL for Indiana forestland

Lab Exercise #7 - Calculate WPL for Indiana Forestland and Crop Land  (Due March 22 )

Handout Spreadsheet Shell

Economics of Indiana Forestland PP, Row Crops PP

 

 

 

 

 

24 M   

March 4

Complete Break-Even Unit, Review for Examination 2

 

 

 

 

 

25 W

March 6

Examination 2

 

  Past Examinations: 2012,  2011, 2010, 2000; 2008

Warning: Many questions in previous exams are no longer relevent

  

 

 

 

26 F   

March 8

Holding and Liquidation Value of Indiana Forestland 

Lab Exercise #7, Continued

(Due March 22 )

 

 

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

 

 

 

 

 

 

March 11 - 16

Spring Break

 

 

 

 

 

27 M  

March 18

Introduction to Taxes

 

 

 

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

Text: Study Chapter 11
Introduction to Taxes PP

 

28 W

March 20

Economic Aspects of Taxation

 

 

 

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

  Text: Study Chapter 11

Introduction to Taxes PP

 

 

 

  29 F  

  March 22

Introduction to Woody Barton Case Study

 

 

 

  Objective: Become familiar with the inventory and financial data provided by Mr. Barton. Calculate NPV and IRR of revenues and expenses since Mr. Barton purchased the property

 

 

 

 

 

30 M  

March 25

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 Intro PP

Timber Depletion Example PP

 

 

 

 

31 W

March 27

Taxes, cont.

 

Text Ch. 9

Types of Contracts

 

 

Objective: Be able to conduct after-tax DCF and understand the impact of taxes on soil expectation value (SEV) 

 

 

 

 

 

32 F

March 29

Barton Tree Farm case study

Lab. Exercise #8 - Case Study

Handout  

Appendices Available in Class

Woody and Ann Barton Tree Farm

Depletion Data

 

 

(Due April 26)

 

 

 

 

33 M   

April 1

Review for Exam 3

Past examinations: 2012, 2011, 2010, 2009, 2008

 

 

 

 34 W

 April 3

Examination 3

 

 

 

 

35 F   

April 5

Barton Tree Farm case study and discuss exam

 

 

Objective: Continue working on case study

 

 

 

 

 

36 M  

April 8

Tax treatment of reforestation expenses

Assign:

Reforestation

 

 

Objective: Know how reforestation expenses are recovered to tax purposes

 

 

 

 

 

37 W

April 10

No class  

 

 

Objective: Work on paper

 

 

 

 

38 F   

April 12

Woody Barton Case Study

Lab. Exercise #8, Con't.

 

 

 

(Due April 26)

 

 

 

  Prof. Hoover will not be in attendance

39 M  

April 15

Forest Valuation and Appraisal

 

 

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

Valuation & Appraisal PP

Supplemental Appraisal PP

 

 

 

 

 All non-lab exercises due by 5:00 PM

40 W

April 17

Estimating Nonmarket Values (Dr. Benjamin)

 

 

Objective: Understand methods to estimate value of benefits not traded in a market.

Text: Study Chapter 12

Nonmarket Values

 

 

 

 

41 F  

April 19

Work on WBTF Case

Lab #8 Continued

 

 

Objective: After-Tax IRR and NPV

(Due April 26)

 

 

 

 

42 M        

April 22

Economics of Recreation (Dr. Benjamin)

 

 

Objective: Gain an awareness of the economic and cultural role of outdoor recreation in forested regions

Study: Reeder and Brown . 2005. Recreation, Tourism, and Rural Well-Being. USDA Economic research Report No. 7, 38 p.

Power Point

 

 

 

 

 

43 W

April 24

Forest Certification and Carbon Credit Markets, and Prof. Mills reviews timber mgt. course and relationship to this course

 

 

 

Objective: (1) Learn the basic concept of carbon credit markets and how they can benefit woodland owners. (2) Understand  how the concepts you have mastered in this course will be applied in FNR 409, Timber Management

Certification and Carbon Credit Markets

 

 

 

 

44 F

April 26

Review for final

 

 

 

 

 

Tuesday

April 30,

Final Examination   Room FORS 216,  8:00 to 10:00 AM

Past final examinations: 2012, 2011, 2010, 2009, 2008

Friday

May 3

Research paper due by 5:00 PM