ICAR AICE-JRF/SRF Forest Economics & Valuation: practice questions

1 · Time value of money in forestry: compounding and discounting · hard

A project has an NPV of 1000 over 20 years at 6%. What is its equivalent annual annuity?

1. 50.00
2. 60.00
3. 87.18
4. 311.80

2 · Net present value, internal rate of return and benefit-cost ratio · hard

A forestry project has a planting cost, then thinning revenues, then a large site-restoration cost after harvest. Why might IRR mislead here?

1. IRR can be computed only for projects lasting less than ten years
2. IRR always equals the discount rate whenever costs occur at the end of a project
3. IRR ignores revenues and considers only costs
4. Cash flows change sign more than once, so there may be several IRRs or none

3 · Net present value, internal rate of return and benefit-cost ratio · medium

Projects of different lengths are best compared by:

1. Comparing undiscounted total revenue of each project
2. Equivalent annual annuities, or LEV for perpetual rotations
3. Choosing the project with the shortest payback period
4. Comparing their first-year costs only

4 · Land expectation value and the Faustmann formula · medium

A negative LEV at a given interest rate means that:

1. The land is worth more for forestry than for any other use
2. The trees on the land will grow faster than expected
3. The interest rate used must have been zero
4. Forestry on that land earns less than the interest rate

5 · Economic (financial) rotation versus biological rotation · hard

Including a risk of catastrophic fire in rotation analysis generally:

1. Lengthens the optimal rotation
2. Shortens the optimal rotation
3. Has no effect on the rotation
4. Makes the rotation identical to the biological one

6 · Forest valuation and stumpage appraisal · hard

Under international financial reporting standards for agriculture, forest biological assets in company accounts are generally measured at:

1. Historical cost of planting only
2. Zero until the trees are harvested
3. The replacement cost of the land
4. Fair value less costs to sell

7 · Valuation of non-market goods and ecosystem services · hard

A major criticism of contingent valuation is that:

1. It can measure only use values and never captures any non-use values at all
2. It always gives values identical to market prices
3. Hypothetical payments may overstate values, and results depend on design
4. It requires no sampling of respondents

8 · Forest taxation, subsidies and incentives · medium

An annual property tax on the value of standing timber tends to:

1. Lengthen rotations, because the tax falls only once, at the time of harvest
2. Have no effect on rotation length under any assumptions
3. Make owners plant only slow-growing species
4. Shorten rotations, because standing timber is taxed every year it stands

9 · Payments for ecosystem services · medium

In PES, additionality means that payments should:

1. Be added to the provider's existing government salary
2. Secure services that would not have been provided anyway
3. Increase each year by the inflation rate
4. Be made to the largest landowners first, since they hold the most forest

10 · Payments for ecosystem services · hard

PES is most likely to succeed where:

1. No one benefits from the service and land rights are disputed by neighbours
2. The service is measurable, payers are identifiable and providers have secure tenure
3. The service cannot be measured and payments are unconditional
4. Providers have no control over land use