Syllabus

FNR 407 Forest Economics

Spring 2008, January 7 to May 2

Monday and Wednesday9:30 AM, FORS 216

Friday, 9:30 - 11:20 AM, FS 1195

Instructor: William L. (Bill) Hoover

118 FORS, whoover@purdue.edu

(765) 494-3580

whoover@purdue.edu

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. But be aware that I am responsible for many 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 Karen Schneider in FORS 107 can check it for you.

  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:  FNR/AGEC 406 Natural Resource and Environmental Economics

 

 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 tyhe 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 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.

Quizes:

There will be approximately 10 unannounced quizes focusing on the basic concepts you are expected to master, i.e. throughly understand and be able to apply. The purpose of the quizes 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 quizes, the exams and final test your understranding 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 underly 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:

            Examinations, 3 each               35%

Final examination                     15%

Quizzes                                   15%

Exercises                                 35%

            Total                          100%

 

SYLLABUS

 

 

Date

Topic

Assignment

1 M

Jan. 7

(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

Unique Aspects PP

Mastery Concepts

 

 

 

 

2 W

Jan. 9

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. 11

Laboratory - Excel spreadsheet and summation notation

 

 

Objective: Become skilled in doing calculations with Excel and applying summation notation.

Lab Exercise #1 -

Spreadsheet

Handout

       

M

Jan 14

Analytical Tools - Marginal Analysis

 

 

 

  Objective: Learn the basic elements of marginal analysis (MA)

  Assign: Text p. 20-43, Analytical Tools PP

       

4 W

Jan.16

Analytical Tools - Discounted Cash Flow

 

 

Objective: Have a working knowledge of the use of NPV and IRR to make investment decisions.

Assign: Text Chapter 4 Analytical Tools PP
       
5 F Jan. 18 Laboratory - Conduct simple marginal analysis

    Objective: Learn to conduct simple marginal analysis

Lab Exercise #2 - Killmore Wild Game Company

Killmore WGCo

Due January 25

 

 

 

 

6 M

Jan 21

MLK Day, No class

       

7 W

Jan 23

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 January 30

 

 

 

 
8 F Jan. 25 Laboratory - Conduct more complicated marginal analysis  

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

Lab Exercise #3 - Marginal size tree to harvest

Handout

Due February 1

 

 

 

 

9 M

Jan. 28

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 1

 

 

 

 

10 W

Jan. 30

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 Equi PP

Exercise 3

Due February 6

 

 

 

 
11 F Feb. 1 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

Handout

Spreadsheet

Due February 8

 

 

 

 

12 M   

Feb. 4

Examination 1

Review session scheduled on request

Past Examinations: 2007, 2006, 2005, 2004, 2003, 2002

 

 

 

 

13 W     

Feb. 6

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 13

       
14 F Feb. 8

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

Handout

Due February 15

 

 

 

 

15 M  

Feb. 11

Inflation adjusted DCF

 

 

Objective:  Intrepret 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 18
       

16 W  

Feb. 13

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. 15 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

Handout,

Due February 22

 

 

 

18 M  

 Feb. 18

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 25

       

 19 W    

 Feb. 20

 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 February 27

 

 

20 F Feb. 22 Economics of Indiana Forestland