Faustmann's formula

Ok kiddo, let me explain Faustmann's Formula to you like you are 5 years old.

Imagine you have a big orange tree in your backyard. The tree is very important because it provides you with delicious oranges every year. You want to know if it's worth keeping the tree and when is the best time to sell it if needed.

Now, imagine that you know how much it costs to take care of the tree, like pruning, watering, and fertilizing it every year. You also know how much money you can make by selling the oranges every year.

Using all this information, you can figure out how much money you will have in the future from owning the tree. This money is called the "Net Present Value" (NPV) of the tree.

But, since you can't predict the future and things can change, like the price of oranges or the cost of maintaining the tree, you need to figure out the NPV for different possible future scenarios. This is where Faustmann's Formula comes in handy.

Faustmann's Formula is a way to figure out the best time to sell the tree, based on different possible scenarios. It uses math to calculate the NPV of the tree for different scenarios and finds the optimal time to sell the tree that will maximize its value.

In summary, Faustmann's Formula is a way to figure out the best time to sell a tree (or any other resource), based on how much it costs to maintain it and how much money it can make you in the future. It helps you make the best decision by calculating different possible future scenarios.