Net Present Value (NPV) for a Single Rotation

Net Present Value (NPV) for a Single Rotation

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Net Present Value (NPV) for a Single Rotation

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1. Net Present Value (NPV) for a Single Rotation • NPV may include the initial cost of land and land value at time r where, Nt = net cash flow in year t (Rt - Ct) Rt = revenue in year t Ct = expenditure year t n = r = rotation length i = discount rate All cash flows are put in present value terms: Discounted Cash Flow Can make comparisons between cash flows that occur at different times

2. Are most forest properties purchased to only have one rotation? • What does perpetuity mean? • Unreasonable management time frame? • Can account for the total economic potential of the land • Can provide a common time horizon allowing for direct comparison of management alternatives

3. Soil Expectation Value (SEV), Land Expectation Value (LEV), Bare Land Value • NPV of expected revenues and costs of forest management in perpetuity • When realistic, estimates the value of forest land • Identify optimal even-aged management regimes (rotation decisions, thinning regimes, establishment, other treatments)

4. SEV timeline PV1 1st rotation PV2 2nd rotation PV3 3rd rotation PVn nth rotation PV0 of perpetual series PV1 = PV2 = PV3=………PVn

5. Primary objective is to maximize profits from growing timber • Situation specific (based on an individual’s costs, management regime, interest rate

6. Can determine the management option (optimal rotation, thinning) that maximizes SEV, • Confusion with market value, which is the equilibrium price for aggregate sales in the marketplace

7. Soil Expectation Value (SEV) r ∑ [ (Rt-Ct) (1+i)r-t ] t = 0 SEV = (1+i)r - 1 where, r = rotation length in years, i = discount rate t = index on year” 0, 1, 2, . . . r Rt = revenues in tth year Ct = expenditures in tth year

8. Zobrist KW, WSU Extension Manual, EM030

9. What does it mean if SEV < 0? • Future revenue exceeds future costs • What does it mean if SEV > 0? • Future revenue does not cover future costs • Does that mean no one will purchase the land? • What does it mean if SEV = 0? • You will earn exactly the given rate of return that you have selected • You will cover costs but there is no money left to cover the cost of the land itself