MAHUM KAMILHAFIZ RAZAAZKA ANJUMSARA KHURSHIDRAHEEM
SHEIKH___________________________________________________________________Tree
values- Assignment 1Introduction Mr. Smith owns a forest that is
inherited by his father which he considers to be an asset for him.
He has taken the help of Karen Bennett, a resource specialist, to
help him suggest if he should cut the trees or not. He can cut 12"
DBH trees in order to let smaller trees grow faster as more space
will be given to them to nurture. Logger was interested in timber
and proposed Mr. Smith to cutting the trees that were 12 DBH. As
timber was a high volume business the prices for standing timber
were in dollar per thousand MBF. The value of trees depends on the
following things: usable timber Tree quality/grade increase in
timber prices height diameter There were almost 300 trees per acre
on the property out of which many had no commercial use except for
firewood due to low quality and size. Strategies are: cut all the
tress now Un-thinned unmanaged tress i.e leaving the unwanted crops
to grow in future and cut the less desired trees. Thinned and
managed i.e. cutting about half of the 12 and 14 trees. This will
allow growing 1 in diameter in 5 years.Forecast the value of trees
under various scenarios given in the case:When there is no change
in grades:Since it is given in the case that the average price
above inflation for wood is 1-3% so by assuming a growth rate of 2%
so the PV will be as follows:$ Grade 4= 40No. of trees= 1000Per
board feet= 40/1000 =0.04Assumption: Coc @ 10%. Therefore
PV:InchesBoard Feet/ TreeCash flowsCocPVIFGrowth ratePV
14"1100.044.410%0.4630.022.0372
16"1800.047.210%0.4630.023.3336
When the grade changes: When the grade changes the price also
changes as there is increase in quality from grade 4 to 3. For one
tree it would depend upon the size and growth. If we are assuming 2
growth in 10 years than it could be one of two values.Grade 4=
120Trees= 1000Per board feet= 0.12InchesBoard Feet/ TreeCash
flowsCocPVIFGrowth ratePV
14"1100.1213.210%0.4630.026.1116
16"1800.1221.610%0.4630.0210.0008
The 1st option of cutting all the trees down now would be valued
as followed.
Total TreesInchesNo of treesBoard Feet/ TreeTotal board feetPer
TreesNo of trees$ Price for Grade 4Total
240012"12006072,000
14"1200110132,000
204,0001000204408160
The 2nd option of cutting all of the trees down in 10 years
would be valued as followed. Growth rate would only be 1 for every
10 years.
InchesBoard Feet/ TreeTotal board feetPer TreesNo of trees$
Price for Grade 4Total
40% 0f 2400960
Grade 4 Trees48013"8540,800
48015"14569,600
110,4001000110.4404416
InchesBoard Feet/ TreeTotal board feetPer TreesNo of trees$
Price for Grade 3Total
60% of 24001440
Grade 3 Trees72013"8561,200
72015"145104,400
165,6001000165.612019872
Total Value24288
COC10%
PVIF0.463
$ PV11,245.34
The 3rd option of cutting the trees down now and the other of
the trees down in 10 years is valued as followed. We assume that we
get no cash inflow from the trees we harvest now as that is the
cost to manage the forest.InchesBoard Feet/ TreeTotal board feetPer
TreesNo of trees$ Price for Grade 4Total
20% of total240
Grade 4 Trees12014"11013,200
2"Growth12016"18021,600
34,800100034.8401392
Out of a total of 2400 trees sell half and keep half i.e. 1200
each.
Grade 3 Trees 80%960
2"Growth48014"11052,800
48016"18086,400
139,2001000139.212016704
Total18096
COC10%
Growth2%
PVIF0.463
$ PV8,378.45
Find present value of the trees/forest using a discount rate of
6.50%60*40= 240012"= 1200*60= 72,00014"= 1200*10= 132,000Total=
204,000Growth rate= 6.5% Prices are as stated
below:20152016201720182019202020212022202320242025
Grade 44040.9241.8642.843.8144.845.8546.947.9849.0850.2
Grade
3120122.76125.56128.47131.43134.45137.5140.7143.94147.25150.64
Corresponding Present
Values:12240048965008.65123.65141.655362.35483.55612.045740.565877.76007.36144.5
81600979610017.210247.310483.310726.310971.211220.011481.1211745.512015.612292.2
SUM1468615025.815570.915724.916088.616454.616832.0417221.617618.2518022.918436.7
NPV= 118,504.6Which strategy of tree cutting results in highest
value of the forest?Assuming that we only have a ten year time
frame it appears that option two, allowing the forest to grow
another ten years before we cut down the good trees would get him
the most money at a PV of $23,723.39 where as cutting them all down
now would get him the least amount of money at a PV of $8,160.
Managing the forest has a value in the middle with $17,675.32.
Based on these three options, option number two would be the best
for the ten year period.
