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    NPV-maximizing rule

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    A classic problem in management of forests is determining when it is most economically advantageous to cut a tree for lumber. When the tree is young, it grows very rapidly As it ages, its growth slows down. Why is the NPV-maximizing rule to cut the tree when its growth rate equals the discount rate?

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    The growth rate slows down over the years.
    As long as the growth rate is more than the discount rate it is advantageous to let the trees grow.
    As soon as the growth rate equals the discount rate it is advantageous to cut the trees as the NPV will decline when the growth rate becomes less than the discount rate.

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    Solution Summary

    Proves why the NPV-maximizing rule is to cut the tree when its growth rate equals the discount rate.

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