You Are Considering an Investment in a Tree Farm

question 2

Essay

You are considering an investment in a tree farm. Trees grow each year by the following factors: The price of lumber follows a binomial lattice with 0. The interest rate (risk-free) is constant
at 6%. It costs $2 million each year, payable at the beginning of the year, to lease the forest land. The initial value
of the trees is $5 million (assuming they were harvested immediately). You can cut the trees at the end of any
year and then not pay rent after that. With rent of $2 million per year, find the best cutting policy and the value
of the investment opportunity.

---

Definitions:

Revenue Account

An account that shows the income generated by a business from its normal operational activities.

Fully Depreciated

A status of a fixed asset when its book value is reduced to zero through depreciation over its useful life, assuming it has no salvage value.

Discarded

Refers to items or materials that have been thrown away or disposed of because they are no longer useful or required.

Accumulated Depreciation

The total amount of an asset's cost that has been allocated as depreciation expense since the asset was put into use, representing how much of the asset's value has been used up.