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You purchased 40 acres of forest land for $50,000 as an investment. After three years, you prune your trees at a cost of $100 per acre. You estimate your income from selective timber harvesting will be $3,000 per acre beginning 20 years from when you purchased the property and occurring every 10 years thereafter in perpetuity. You have annual property taxes of $4 per acre starting next year. What is the present value of this investment, assuming a 6 percent discount rate?

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Keith Leannon
Keith LeannonLv2
28 Sep 2019

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You own forest land in California. You estimate that California’s forest practice regulations will impact you financially in the following ways:

-Cost of a forest management plan is $100 per acre, to be obtained immediately.

-Additional harvesting cost to comply with the regulations: $250 per acre.

-Value of timber left standing after harvest to comply with regulations: $700 per acre.

-You plan to conduct two timber harvests: one five and another eight years from now.

-All costs and timber prices increase at the rate of inflation and are 2012 values.

-Your opportunity cost (in real terms) is 6 % per year.

What is the present value of the additional costs of California’s forest practice regulations?

A family woodland property is being sold by your parents who are retiring. Your siblings and you decide to purchase the farm to keep it in the family. The plan is to purchase the land and make a number of forest management investments, with the intent of generating income from timber and leasing the hunting rights. Your estimated costs and returns are as follows:

• $900/acre purchase price of land, paid back annually in equal installments over 10 years @ 6% annual interest.

• $300/acre tree planting costs incurred 1 year after purchase.

• $1000/acre forest management costs 3 years after purchase.

• $50/acre forest management costs in starting 5 years after purchase and continuing until 10 years after purchase (years total).

• Annual hunting lease of $100/acre beginning in years 6 years after purchase and continuing until 15 years after acquiring the land.

• $5/acre/year in property taxes and liability insurance, beginning immediately and paid each year you own the land.

• $3,000/acre income from the sale of timber 15 years after acquiring the land.

• $1,200/acre from the sale of your forest land 16 years after acquiring the land. You sell your land on the last day of this year.

• Your ARR is 4%.

A-What is the present value of the tree planting cost?

B-What is the present value cost of the $1,000 forest management cost?

C-What is the present value of the revenue generated from selling the forest land?

D-What is the present value of the 1st payment received for the hunting lease?

E-What is your annual payment for the loan you took out to purchase the land?

F-What is the present value of the 5th loan payment?

G-What is the present value of the revenue generated from timber harvesting?

H-What is the NPV of revenue and costs in the year you sell the forest land?

I-What is the net present value of revenue and costs incurred in year 10?

J-What is the net present value of revenue and costs incurred in year 10?

K-What is the net present value of revenue and costs incurred in year 11?

L-What is the discounted sum of revenue and costs in year 3

M- Assume these new values of certain revenue and costs for the project. Unless they are specified below, use the original revenue and cost assumptions listed at the top of this assignment. .

· $1,000/acre land purchase price, paid back annually in equal installments over 7 years @ 3% annual interest.

· No hunting lease revenue.

· $1,500/acre timber sale income 10 years after acquiring the land (instead of receiving $3,000 in timber income 15 yrs after acquiring the land).

· $2,500/acre from the sale of your forest land 16 years after acquiring the land.

Re-evaluate the project's worth (i.e., calculate the NPV of this project) using these new values for certain benefits and costs.

A -you found a parcel of well-managed forest land that can sustainably produce $100/acre/year of timber income in perpetuity. What is your maximum willingness to pay for the land, assuming a 5.5% discount rate and you need to justify your purchase price solely on its ability to generate timber income?

b-You have two possibilities for generating revenue from your wetlands. The first possibility is to lease your land to a local hunting club in return for 15 annual payments of $200 per acre. The other possibility is to enroll the land in a conservation program and receive $100 per acre every other year for a total of 10 payments. With both possibilities, you would receive the first payment immediately. Which option is the most financially attractive to you if your ARR is 5 percent?

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