What is the rate of return for timber production only?

What is the rate of return for timber production only?

• A. 4% with a net present value of $1000 per acre
• B. 6% with a net present value of $1500 per acre
• C. 5% with a net present value of $1250 per acre
• D. 0.5% with a net present value of $200 per acre

Answer: (C)

The question is testing the return you get from timber production alone—the internal rate of return (IRR) of the timber cash flows, without counting any land value or non-timber benefits. In timber-only analysis, you focus on what the timber sells for and the costs directly tied to growing and harvesting it, and you express that profitability as a rate of return. The correct pairing—5% with an NPV of $1250 per acre—fits the idea that timber production can be a positive, moderate-return activity on its own. An IRR of 5% indicates the timber cash flows, when discounted at 5%, leave $1250 of value per acre after accounting for the initial timber-focused investment. The other options either imply a higher or lower rate with a very different NPV, which would be inconsistent with a typical timber-only cash-flow pattern, making them less representative of timber-only profitability.

The question is testing the return you get from timber production alone—the internal rate of return (IRR) of the timber cash flows, without counting any land value or non-timber benefits. In timber-only analysis, you focus on what the timber sells for and the costs directly tied to growing and harvesting it, and you express that profitability as a rate of return.

The correct pairing—5% with an NPV of $1250 per acre—fits the idea that timber production can be a positive, moderate-return activity on its own. An IRR of 5% indicates the timber cash flows, when discounted at 5%, leave $1250 of value per acre after accounting for the initial timber-focused investment. The other options either imply a higher or lower rate with a very different NPV, which would be inconsistent with a typical timber-only cash-flow pattern, making them less representative of timber-only profitability.