Response to the following problem:
A firm has invested in a stand of timber. It is considering the optimal time for harvesting. The firm recognises that the trees are growing over time and the value of the timber is increasing over time, to a certain point of time. At the same time, the cost of the firm's investment also increases as you wait, because the interest charges accumulate on the loan obtained for the investment. The cost of the capital tied up in the project is 9%. The net values of the timber harvest at different future dates are given below
|
Year of Harvest
|
0 to 5
|
6
|
7
|
8
|
9
|
10
|
|
NFV ($'millions)
|
0
|
112
|
124
|
132
|
142
|
150
|
NFV = Net Future Value
The firm has no plans to grow a second crop after the harvesting of this existing crop. With appropriate explanations and calculations, determine the optimal point to harvest.