UnitedStatesGdDepartmentofmrtAnalyzengServicetBNorthCentralForestExper - PDF document

1 _UnitedStatesGd_Departmentofm_°r_tAnalyz
_UnitedStatesGd_Departmentofm_°r_tAnalyzengServicetBNorthCentralForestExperiment_tea_ie°r_,Technica,investmentReportNC-123MOptionsUsingTWIGSCharlesR.Biinn,DietmarW,RoseandMorfiqueL.Be_Ji .............................................................................................................................!]!!!rI!]!lWH................................................_q__,_[_I............................................................................................................._[]_[___==__.....................................................................................................NorthCentralForestExperimentStationForestService--U.S.DepartmentofAgriculture1992FolweUAvenueSt.Paul,Minnesota55108ManuscriptapprovedforpublicationMay23,19881988 PREFACEResearchreportedherewassupportedbytheCollegeofNaturalResources,theAgriculturalExperimentStationunderProjectMN4240,andtheMin-nesotaExtensionService,UniversityofMinnesota,St.Paul,MN55108;theUSDAForestService,NorthCentralForestExperimentStation,St.Paul,MN55108;andtheForestResourcesSystemsInstitute,Florence,AL35630.TheForestResourcesSystemsInstitutereceivesFederalfinan-cialassistance.BenefitsoftheForestResourcesSystemsInstituteareavailabletoalleligiblepersonsregardlessofsex,race,color,nationalorigin,religion,handicap,oragePublishedasPaperNo.2,165oftheMiscellaneousJournalSeriesoftheMinnesotaAgriculturalExperimentStation. ContentsPageBackgroundInformation....................................1TWIGSInvestmentAnalysis.................................4ExampleofanInvestmentAnalysisUsingTWIGS...............4Scenario...............................................4InvestmentAnalysisInput................................5InvestmentAnalysisOutput...............................5InvestmentAnalysisDecisionmaking........................9LiteratureCited..........................................10Appendices..............

2 ................................11A.Summ
................................11A.SummaryofPublishedStumpagePriceReviewsfortheNorthCentralRegion..............................11B.InvestmentAnalysisPreparationForm...................12C.EconomicInputsfortheAnalysisofa56-Year-OldRedPineStand..........................................14 GUIDETOANALYZINGINVESTMENTO IONSUSINGTWIGSCharlesR.Blinn,Dietma:rW:Rose,andMomqueL.BelliForestlandowner_andmanagersfhceamyriadofBACKGROUNDINFORMATIONpossibilitieswhenevaluatinginvestmentoppor-tunitiesandpotentialtimbermanagementprescrip._Thecomponentsthatshouldbep_tofanyinvest-tions.Thevariousmanagementalternativesneedtomentanalysisinclude:(I)developingaclearstate.-beidentifiedandevaluatedtodeterminehowfundsrnentof"theinvestor'sobjectivesandtimehorizon,shouldbestbeallocatedtomeetthelandowner'sor(2)identifyingoneormoreviablealternativesforlandmanager'sobjectives_meetingeachobjective,(3)evaluatingandcompar-TheTWIGSmicrocomputerprogram(Belcheringtheviablealternatives,and(4)implementingand1.982,Minereta[1988)canhelpmanage_estimatemonitoringtheappropriateinvestment(s).changesinlx)thtimerand:financiMresotmcesunderForeachinvestmentalternative,the_maly_must:d_e_ntmanagementp_:_riptioI_s_ff_,_GS,amodel(1)determinewhatma:nagementactivitieswilloc-thatprojectsthe_x)wthanddeathofindividualtreescurandinwhatyear,(2)estimatetheamountofinthecontextofastand,isatoolthatallowsforestmoneythatwillbespentorreceivedaswellasthemanage_andplannerstointeraetively"manage"degree(ffuncerta:inty_sociatedwitheachcashflowand"grow"existingstandswithacomputer,estimate,(3)developa"cashflow"tablethatplacestheappropriateamountinthecorresImndingyearTheeconomicanalysisofTWIGSversion3.0sum.-marizesannualcashflows,calculatesseveralofoccurrence,(4)determinetheminimalacceptablemeasuresofeconomic_rfbrmanceona_fore-taxrateofreturn(MARR)(aninterestrate)requiredbybasis,andevaluatestheeconomicuncertaintytheinvestor,(5)calc

3 ulateandanalyzemeasuresof"_%_)ciatedwith
ulateandanalyzemeasuresof"_%_)ciatedwitham_nagementalte:mativ_Withthisfinancialprofitabilit}_and(6)calculateandanalyze•theuncertainty_ciatedwiththealternative..At_rinformation,fbrestmanage_arebetterableto_alyzetimbermanagementinvestmentatternativeaallinvestmentalternativeshave_nevaluated,theone(s)thatrepresentthemostefficientu_ofThispaperbrieflyintrc_ucesinvestmentanalysisavailablere_ureesisimplementedandmonitored.conceptsanddiscuseshowananalysismightbeper-If"youhavelittleor:noexperienceinwoodlandfb_medwith[×_ththeCentralandLakeStatesmanagementortimbermarketing,seekthevariants(version3.0)of'TWIGS,expandingontheassistanceofaprofessionalforesterwhenunder-examplefoundinMineretaL(1988).A_paratetakingthe_activitiesTheforestercanprovideusefulrepoctde_Tibesinvestmentanal_isin_aterdetailinformationontimbermanagementalternativesas(Bx)seetaL1988).wellascurrentdataforthetimingandamountofcashflowsthatcouldbeexp_withinyourlocali-ty.TypicalcoststhatmayoccurwhenevaluatingtimbermanagementalternativesincludepropertyCHARLESBLINN,AssistantProfe_or/Extensiontaxes,consultingfees,andfeesforsalepreparationSpecialist,DIETMARROSE,Professor,andandadministration.ThesellingofstandingtimberMONIQUEBELLI,formerApplications_ammer,isatypicalrevenue.Otherrevenues,suchasincomeDepartmentofForestResources,Collegefromahuntingrightslease,couldalsobeincludedofNatural_)urces,UniversityofMinne_ta,St.Paul,inthecashflowtableffappropriate.Minnesota55108. MostStatespublishstumpagepricereviewsthatnow.Discountingisaprocedurethatdeterminesthecanbeusefulforestimatingaveragepricesreceivedpresentworthofafutureexpectedcashflow.Thedis-forharvestedtimber(AppendixA).However,stum-countrateissometimesknownastheminimumpageisanunusualcommoditythathasnoexactoracceptablerateofreturn(MARR).TheMARRforan"going"price.Instead,thesellingpriceiswhateveranalysisshouldbeyourcostofcapital.Therefore,anthebuyerandselleragreetoa

4 ndisinfluencedbyinvestorwhocanborrowmone
ndisinfluencedbyinvestorwhocanborrowmoneyat10percentwouldmanyfactors,including:(1)species,(2)size,(3)quality,specifyaMARRof10percent.Foraninvestorwho(4)volumeofsale,(5)distancetomarket,(6)siteisgoingtousemoneythatisnotborrowed,theaccessibility,(7)loggingdifficulty,(8)marketcondi-MARRbecomestheinterestratefortheinvestmenttions,(9)buyer'sloginventory,and(10)seller'srestric-accountwheremoneyisbeingheld(e.g.,asavingstionsonharvestingandskiddingtechniques(Blinnandloanpassbookaccount,aCertificateofDeposit,andHendricks1985).Inaddition,becausestumpageabond,etc)ortheinterestrateassociatedwiththepricereviewscoverbroadgeographicareas,youmostfinanciallyattractiveviablealternativeshouldusereportedpricesonlytoobtainagrossinvestment.estimateof'revenues.YourMARRmaychangeastheoverallrateofin-Threegeneraltypesofcashflowsarepossibleinflationwithintheeconomychanges.Discountratesananalysis:orMARR'sthatdonotincorporateanoverallinfla-tionratearecalledrealrates.Adiscountratethat1.Singleoccurrence:anactivitythatoccursoncecontainsarealcomponentaswellasanoverallin-duringtheanalysis.Anexamplemightbetothinflationrateforthewholeeconomyiscalledanominalatage40.Youmustknowtheyearofoccurrencerate.Adiscountratethatisdevelopeddirectlyfromandtheamount,aratequotedfromafinancialsavingsand/orlendinginstitutionisanominalratebecauseitincorporates2.Annualoccurrence:anactivitythatoccursinarealrateaswellastheeconomy'sinflationrate.eachyearfor2ormoreconsecutiveyearswiththeNominalratesarehigherthanrealratesaslongassamecashflowoccurringeveryyear.Anexampletheinflationrateisgreaterthanzero.Manypeoplemightbeannualpropertytaxes.Youmustknowprefertoconductaninvestmentanalysisusingathefirstandlastyearsofoccurrenceaswellasthenominaldiscountratebecauseitisrelativelyeasyamount,tocalculateaMARRusingsavingsandloanrates3.Periodicoccurrence:anactivitythatcostsoravailablefromfinancialinstitutions.However,theim-return

5 sthesameamounteveryyearbutdoesnotpliedge
sthesameamounteveryyearbutdoesnotpliedgeneralinflationratemuststillbeestimatedoccurinconsecutiveyears(fertilizingwiththetoconducttheproperanalysis.Aninvestmentana-samerateofapplicationevery5years)oranac-lyzedusingarealdiscountrateshouldnotbecom-tivitythatmayormaynotoccurinconsecutiveparedwithanalternativeassessedwithanominalyearswithvaryingcashflows(Christmastreediscountrate.shearingcoststhatvaryduetoannualdifferencesIndividualcashflowsmayhavedifferentratesofinnumberoftreesperacreand/ortreesize).Youinflationthantheoverallrateassumedinthemustknowthenumberoftimestheactivityoc-analysis.Asanexample,stumpagerateshavecursandtheappropriateamountforeachyearofhistoricallyappreciatedfasterthantheoverallinfla-occurrence,tionratewithintheeconomy.Anadditionalinfla-tionratemaybeincludedforstumpage,ifitcanbeInterestisamechanismforequilibratingthesup-determined.Additionalinflationratesforotherfac-plyanddemandforinvestmentcapitalandsavingstorsareusuallynotincorporatedbecausetheseratesovertimeItcanalsobethoughtofasthereturnthatarehardtodetermine.canbeobtainedfromtheproductiveinvestmentofcapitalortherent(price)thatispaidtolendersforVariouscriteriahavebeendevelopedforevaluatingusebyborrowers.Althoughyoumaynotneedtobor-aninvestment'sperformance.Someoftheinvestmentrowmoneytofinanceyourinvestments,interestcon-performancemeasuresincludenetpresentvalueceptsarestillappropriatewhenevaluatingin-(NPV),equivalentannualincome(EAI),soilexpec-vestmentsbecausecapitalinvestedinforestrycouldtationvalue(SEV),benefitcostratio,paybackperiod,beusedinanalternativeinvestment(forexample,andintenaalrateofreturn(IRR).Eachofthesefac-aCertificateofDeposit)thatmayhaveadifferenttorsisdefinedbelow.profitabilityandassociatedrisk.Mostinvestmentanalysesuseanappropriate"dis-1.Netpresentvalueorpresentnetworthcountrate"toreflectthenotionthatadollartoday(PNW).--Presentvalueofexpectedrevenuesminusisworthmorethan

6 thesamedollar10yearsfromthepresentvalueo
thesamedollar10yearsfromthepresentvalueofexpectedcosts,withallcosts,2_lilll,i,,,,,,,,iiiiiiiill¸HIIIIllIllIIIrI'i'Ill1II"IIiIiiilillIIIIII1[ andreturnsdiscountedattheMARR.NPVcan-6.Internalrateofreturn.--Thediscountratethatnotbeusedtodirectlycomparealternativeswithequatesthepresentvalueofdiscountedcostsanddifferentinvestmentlengths.Investmentsthatrevenues,orthediscountratethatwouldmakehaveapositiveNPVwillyieldahigherfinancialNPVequalzero.IRRisgenerallycalculatedus-returnthantheMARRusedindiscounting.Ifinganiterativeprocesstosolvefortheappropriateeverythingisequivalent(risk,investmentlength,discountrate.AnIRRsmallerthantheMARRinitialinvestment)betweentwoormoreinvest-usedintheanalysisindicatesthattheinvestment'smentalternatives,youwouldgenerallyselecttherateofreturnislessthantheMARR(theinvest-onethatyieldsthehigherpositiveNPV.mentwouldalsoyieldanegativeNPV).IRR'sex-2.EquivalentannualincomeorequalannualceedingtheMARRreflectaninvestmentwhoserateofreturnwillexceedthisalternativerate.Youequivalent.--Netpresentvalueconvertedtoanwouldgenerallyselectinvestment(s)withtheannualvaluepaidattheendofeachyearoverthelifeoftheinvestmentwithinterestcalculatedathighestIRRthatexceededtheMARR,givenequalriskbetweeninvestments.theMARR.BecauseEAIiscalculatedusingNPV,itsinterpretationissimilartoNPVwhencompar-Thetwomostfrequentlyusedcriteriaforcompar-inginvestmentalternatives,inginvestmentsareNPVandIRR.Althoughallthe3.SoftexpectationvalueortheFaustmannfor-variousevaluationcriteriawillfavorthesameinvest-mula,barelandvalue,orlandexpectationmentalternativeswhenthedecisioninvolvescom-value.--Thevalueofbareforestland,equivalenttoparingopportunitiesthatareindependent(atleastthecapitalizedvalueofaninfinitelylongseriestwoalternativescanbechosen),criteriamaydifferofcashflowsresultingfromtimbermanagement,wheninvestmentalternativesaremutuallyexclusiveSEVrepresentsthemaximumamountthatcould(onlyo

7 neofthefeasiblecandidateinvestmentscanbe
neofthefeasiblecandidateinvestmentscanbepaidforatractoflandandstillearntheMARR.bechosen).TheIRRcriterionismostappropriateItisusefulforestimatingthebidpriceofbarelandwhencapitalistheprimarylimitingfactor(e.g.,noforgrowingsuccessivecropsofeven-agedtimber,morecapitalcanbeborrowed)orwhenalternativesBecauseSEVisdefinedasthevalueofbareforestareindependent.TheNPVcriterionismostap-land,forestmanagementalternativesmustincor-propriatewhenlandistheprimarylimitingfactorporateallcashflowsthatoccurduringacomplete(e.g.,onlyoneparceloflandisbeinganalyzed)ormanagementrotation,startingwithinitialsitewhenalternativesaremutuallyexclusive.treatmentsonbareland,tocorrectlyusethisin-Evaluatetheamountofriskoruncertaintyvestmentcriterion.LandpurchasecostsandlandassociatedwitheachinvestmentcashflowbothbeforesalereturnsmustberemovedfromananalysisandafteranalyzingeachalternativeRisksarenonin-beforeameaningfulSEVcanbecomputed.Ifallsurablelossesthatmayoccur,suchasphysicalcriterionassumptionsaresatisfied,SEVisusefulwhencomparingmanagementalternativesthatdamage,increasesincosts,ordecreasesinproductprices.Althoughthereareseveralmethodsforac-havedifferentrotationlengths.WhereSEVcanbeappliedcorrectly,selectthealternativethathascountingforriskinaninvestmentanalysis,sensitiv-thehighestvalue,givenequivalentriskandini-ityanalysisisacommonapproachtodealingwithtialinvestment,thisuncertainty(Roseeta/.1988).Sensitivityanalysisisconductedasapartofaninvestmentanalysisto4.Benefitcostratio.--Thepresentvalueofdis-evaluatehowaspecifiedchangeineachcashflowcountedrevenuesdividedbythepresentvalueofaffectsthevariousmeasuresofinvestmentdiscountedcosts.Abenefitcostratiogreaterthanperformance.oneindicatesthatdiscountedbenefitsexceeddis-Toavoidbiasingtheinvestmentdecision,establishcountedcosts.Ifeverythingisequivalent(risk,in-thedegreeofconfidenceforeverycashflowestimatevestmentlength,initialinvestment)betweentw

8 obeforeperformingtheinvestmentanalysis.A
obeforeperformingtheinvestmentanalysis.Activitiesormoreinvestmentalternatives,selecttheoneconsideredtobeuncertain,eitherduetoawiderangethatyieldsthehigherpositivebenefitcostratio.orvariabilityinamount,andthoseactivitiesiden-5.Paybackperiod.--Thelengthoftimeneededfortiffedascriticalfactorsbythesensitivityanalysisaninvestment'scumulativeannualnetcashflowsdeservefurtherspecialattention.toexceedtherequiredinitialinvestment.CashYoumaydecidetoimplementoneormorealter-flowsaregenerallydiscountedwhenthisfactoriscalculated.Investmentswithshortpaybackperiodsnativesa_rperformingalltheappropriateanalyses.aresometimesconsideredtohavealowerriskMonitoringproceduresshouldbeconductedduringtheimplementationphase,aswellasthroughoutthebecausethereismorecertaintywhenestimatingcashflowsthatdonotoccurfarintothefuture.3iiiiiiiifi lifeoftheinvestment,toincreasethechancesoffinan-Thevariousinvestmentanalysistablesproducedcialsuccess.Monitoringwillprovideinvaluablein-byTWIGSinclude:(1)asummaryofcashflow:in-formationabouttheinvestmentstatusandprofitabil-puts,(2)anannualcashflowsummary(anoptionalityaswellasdatathatmightbeusefulwhenanalyz-output),(3)ananalysisofNPVatevendiscountratesingand/ormonitoringotherinvestmentalternatives,between0and50percent,(4)asummaryofthesixFurtherinformationoninvestmentanalysisininvestmentevaluationcriteriadefinedabove,(5)thegeneralandmonitoringproceduresinparticularmaysensitivityofNPV,EAI,andSEVtoa10-percentbefoundinRoseetal.(1988).changeintheoriginalcashflowvalueforeachin-vestmentactivity,and(6)thepercentchange,uptoTWIGSINVESTMENTANALYSIS100percent,foreachcashflowvaluesothatNPVwillbecomeexactlyzero.AlthoughTWIGSdoesnotautomaticallyperformanafter-taxanalysis,youAtoolsuchasTWIGSisusefulforpredictingshouldconsiderthisfactorwhencomparingfuturetimberyieldsunderalternativemanagementalternatives.strategieswhenanalyzingforestryinvestments.TheTWIGSEconomicsMenuissh

9 owninfigure1.TWIGSassumesthatallcashflow
owninfigure1.TWIGSassumesthatallcashflowsareenteredinEXAMPLEOFANINVESTMENTbaseyeardollarsandthattheyoccuratthebeginn-ANALYSISUSINGTWIGSingoftheindicatedyear.Eitherarealoranominaldiscountratemaybeusedintheanalysis,andin-Hereisanexampleofhowaninvestmentanalysisflationratesforindividualactivitiescanbeincluded,mightbeconductedusingTWIGS.AllthevariousAsingleadditionalinflationratemaybespecifiedinvestmentanalysisstepsarepresentedfortheoneforallspecies-productstumpageprices.TWIGSalternativeanalyzed.automaticallycalculatesandenterstimberharvestingincomesintothediaryofcashflowsbasedonuser-definedstumpagerates.AnexplanationofScenariohowcostsandincomesotherthanharvestingrevenuesareenteredintoTWIGScanbefoundinAninvestorlivinginnortheasternMinnesotaMineretaL(1988).Aformfordevelopingacashwishestoinvestabout$15,500in1987withinvest-flowtable,forrecordingtheassociateduncertainty,mentliquidationtooccurin2007.Furtherinvest-mentmonieswillbeavailableduringthisperiod.Theandforreportingotherinformationrelevanttoaforestmanagementinvestmentalternativeisinvestorisapproachingretirementandwantstomax-presentedinAppendixB.imizereturnsfrominvestingfunds.ECONOMICSMENU:OPTIONVALUEDESCRIPTIONA$29.00Stumpagerateper1000boardfeetofsawtimber(defaultvalue).B$6.00Stumpageratepercordofpoletimber(defaultvalue).C$.00Stumpagerateper100Cultofresidue(defaultvalue).DChangestumpageratesforaspecies(0set,10available).E0Annualstumpagepriceinflationrate(inpercent).F0Setoptiontodisplaycashflowtable0=Donotdisplaytable1=DisplaytableG1987Baseyearforeconomicanalysis(lessthanorequalto1987).H7.10Nominaldiscountrate(inpercent).2.00Generalinflationrate(inpercent).ISee,addoreditthediaryofcostandrevenueactivities(peracre).J0Setoptiontodiscountthecashflows.0=Discountallcashflowsthrough2007.1=Donotconsidercashflowsbeyondthecurrentprojectionyear(1987).KShoweconomicevaluationonscreen.LShoweconomicevaluationonscreen&print

10 er.TypeoptionletterortypeZtocontinue:Fig
er.TypeoptionletterortypeZtocontinue:Figure1.--EconomicsmenuforsettingTWIGSeconomicparameters. Severaldifferentalternativesareidentified,eachTheinvestorandtheforesterarefairlycertainofofwhichmaymeettheinvestor'sobjectives.Onealter-thecashflowestimatesforthe1987thinningsalenativeistoinvestallfundsinarisk-freesavingsac-income.Cashflowestimatesforthe2007clearcutsalecountthatwillyielda7-percentnominalrateofandtheincomereceivedduetosellingthebarelandreturn,includinga4-percentgeneralinflationrate.arebothhighlyuncertain.TheinvestormustpayThis7-percentnominalrateofreturnwasestablishedspecialattentiontotheseuncertaintieswhenastheinvestor'sMARR.AsecondalternativeistoevaluatingTWIGSeconomicanalysisoutputs.purchasea40-acretractoflandwitha56-year-oldnaturalstandcontainingredpine,jackpine,whiteInvestmentAnalysisOutputpine,andpaperbirch.ThissecondalternativeisanalyzedusingtheLakeStatesversionofTWIGS.TheabbreviatedTWIGScashflowtablepresentedintable1summarizesaportionofthedatanecessaryInvestmentAnalysisInputtocalculatethevariousmeasuresofinvestmentper-formance.ThetableisprimarilyalistingofthecashTheinvestoremployedaforestertoinventorytheflowamountsforeachyearoftheinvestment,incor-stand,tocompilethedataintotheformofatreelistporatinginflationwhereappropriate.FourcostandrequiredbyTWIGS,andtodevelopanappropriatethreerevenueactivitiesareincludedintheanalysis.managementplan.ThetreelistforthisnaturalstandThetwosaleincomeswereautomaticallycalculatedisfoundinafilenamedLSTLISTontheLakeStatesandenteredintable1asaresultofmanagementTWIGSdistributiondiskette.Asiteindexof55wastreatmentsprescribed(thinfrombelowto90squarerecordedforredpineduringthe1987inventory.Eachfeetofbasalareain1987,favoringredpine,andclear-acreinthestandcurrentlycontainsanaverageofcutin2007).Cashflowtablesalsopresenttotalex-308trees,abasalareaof132.9squarefeet,andanpendituresandreceiptsandnetrevenuesforeachaveraged.b

11 .h,of8.6inches.Otherstanddataareyearinth
.h,of8.6inches.Otherstanddataareyearintheanalysis.AllcashflowsthatdonotoccurshowninMineretal.(1988).intheanalysisbaseyear(1987)areinflatedbytheappropriaterate.Note,forexample,thatthecashflowTheforesterprescribedathinningfrombelow(tak-associatedwiththesaleincomethatoccursin2007ingthesmallesttreesfirst)in1987toaresidualbasalis$2,745.51.Thisamountwascalculatedaccordingareaof90squarefeetperacre.Redpinewasfavoredtothefollowingformula:intheresidualstandduringthiscommercialthin-ningAclearcutwasprescribedin2007.a(1+gi)n-1(1+ai)n-1Stumpagepricesassumedintheanalysiswererepresentativeofpricesreceivedfrompubliclandinwhere:a=currentpricein1987((stumpageMinnesota(MinnesotaDepartmentofNaturalratetimescutvolume),totaledforResources1986)(AppendixA).Theinvestorandtheallspecies)foresteragreedona1.2-percentannualstumpagegi=generalinflationrate(0.04)priceinflationrate,theaveragerealrateofincreaseai=additionalannualinflationrateforallspeciesacrossallpublictimbersalesinMin-(0.012)nesotaduring1974-1984_.n=periodofoccurrence(21;n-1=Investmentcashflowsrepresentativeofexpected20).costsandreturnsforthelocalarea,aswellastheTherefore,the2007"SALEINCOME"cashflowassociatedcashflowuncertainties,werethenwascalculatedas:estimated(AppendixC).Thepurchaseofthetract(buyland)isanexampleofasingleoccurrenceac-$987.07(1+0.04)2°(1+0.012P°=$2,745.517tivity.Propertytaxesandsalepreparationexpensesrepresentannualandperiodicoccurrenceactivities,Table2providesaprofileofnetpresentvaluesforrespectively.Thesaleofthelandattheendofthetheinvestmentatvariousdiscountrates.Thisallowsinvestmentrepresentstheincomethattheinvestoranassessmentoftheeffectofdifferentdiscountratesbelievescouldbereceivedfromsellingbareland.Allonnetpresentvalue.Thecolumndisplayingnominalcostsassociatedwithemployingtheforesteratthediscountrateswouldnotappearinarealanalysis.beginningoftheanalysisareincludedin1987salepreparationexpenses......

12 .........-J_L/_1Personalcommunicationwit
.........-J_L/_1PersonalcommunicationwithD.Ford,Economis_2HandcalculatednumbersmaynotalwaysagreeMinnesotaDepartmentofNaturalResources,DivisionwithTWIGScalculationsatthehundredthdecimalofForestry,StPaul,MN.placeduetoroundingdifferences. Table1.Aportionoftheannualcashflowtablefortheredpinetimbermanagementalternative1ANNUALCASHFLOWPATTERN(ALLVALUESAREINBASEYEARDOLLARSPERACREINFLATEDTOYEAROFOCCURRENCE)YEARITEM19871988...20062007BuyLand300.00.00....00.00PropertyTax.90.94...1.901.97SalePrep.65.00.00....00142.42SaleAdmin.22.00.00....0048.20.................................................................-.....................................................................TOTANNCOST387.90.94...1.90192.60CUMTOTCOST387.90388.84...413.80606.40SellLand.00.00....00657.34SALEINCOME82.95.00....00.00SALEINCOME.00.00....002745.51.......................................................................................................................................TOTANNRECP82.95.00....003402.85CUMTOTRECP82.9582.95...82.953485.80ANNNETREV-304.95-.94...-1.903210.25CUMNETREV-304.95-305.88...-330.852879.401SALEINCOMEwascalculatedbyTWIGS.Otheritems(showninupperandlowercaseletters)wereenteredbytheuser.Table2.Aportionoftheprofileofnetpresentvaluesatvariousdiscountratesfortheredpinetimbermanagementalternative,asdeterminedbyTWIGSPROFILEOFNETPRESENTVALUE(NPV)FORTHEINVESTMENTATVARIOUSDISCOUNTRATES(INVESTMENTLENGTH=21YEARS)(NPVVALUESAREINBASEYEARDOLLARSPERACRE)REALRATENOMINALRATENPV.00%4.00%$1143.072.00%6.08%$666.924.00%8.16%$351.896.00%10.24%$141.848.00%12.32%$,7510.00%14.40%$-94.7012.00%16.48%$-159.69•••••••••48.00%53.92%$-306.2550.00%56.00%$-306.316...........................,,,,,,,,,,,....,,,....,,,f,,IIi......IllIII[IIIIIIII[IIIIIIIlll[llIIIIIIIIIIIIIII Thebefore-taxmeasuresofinvestmentperfor-Althoughthisinvestmentseemsfinanciallyattrac-manceareshownintable3.Thenominalinternaltir

13 e,sensitivityanalysisdatamustbeinterpret
e,sensitivityanalysisdatamustbeinterpretedtorateofreturnwouldnotbedisplayedifarealanalysisevaluatetheriskassociatedwiththisalternativehadbeenconducted.AllinvestmentperformanceTable4showsthesensitivityoftheinvestmentper-measures,exceptinternalrateofreturn,areformancemeasuresNPV,EAI,andSEVtoacalculatedattheuser-specifiedMARR(7-percent10-percentchangeintheinputcashflowvaluesfornominalrateinthisanalysis),allactivities.Increasesincostsand/ordecreasesinTheinvestmentperformancemeasures(table3)in-revenuesdecreaseNPV,EAI,andSEVbythedollardicatethattheinvestmentmeetstheinvestor'samountsindicatedinthetableConversely,decreasesmihimumacceptablerateofreturn(7-percentincostsand/orincreasesinrevenueswillincreasethenor:realrate).Infact,theinvestmentyieldsaperformancemeasures.Thelargerthedollaramount7-percentnominalrateofreturnplus$511.61/acreindicatedintable4,thegreatertheimpactofatodayor$34.02/acre/yearoverthecourseofthein-10-percentchangeintheinitialcashflow.Asbefore,vestment.DiscountedbenefitsexceeddiscountedcostsSEVcriteriawerenotmetforthisinvestmentalter-byaratioof2.14to1.00.CumulativenetdiscountednativesointerpretationofSEVsensitivityanalysiscashflowswillrecovertheinitialinvestmentofdataisnotappropriate$304.95/acre($387.90incostsminus$82.95inInthisexample,thegreatestimpactonNPVandrevenue)forbuyingthelandandpayingpropertyEAIwouldresultfromchangesinrevenuesassociatedtaxes,andsalepreparationandsaleadministrationwiththesaleincomethatoccursin2007whentheexpensesafterdiscounting20yearsofcashflows,standisclearcut.Ifrevenuesreceivedforthisacti_-Finally,thenetpresentvalueispositiveforallrealtydecreasedby10percent,NPVwoulddecreasebydiscountrateslessthan8.01percentandforall$70.95/acreandEAIwoulddecreasebynominaldiscountrateslessthan12.33percent.The$4.72/acre/year.Similarly,NPVwoulddecreasebysoilexpectationvalue,althoughcalculated,isnotan$16.99/acreandEAIwoulddecreasebyappropria

14 teeconomicperformancemeasureforthis$1.13
teeconomicperformancemeasureforthis$1.13/acre_eariflandsalerevenuesdecreasedby10managementalternativebecausetheunderlyingpercent.SEVassumptionshavenotbeenmet.Table3.Summaryofeconomicperformancemeasuresata7-percentnominaldiscountratefortheredpinetimbermanagementalternative,asdeterminedbyTWIGS1,2INVESTMENTPERFORMANCEANALYSISNOMINALDISCOUNTRATE=7.00%GENERALINFLATIONRATE=4.00%(INVESTMENTLENGTH=21YEARS)(ALLMONETARYVALUESAREINBASEYEARDOLLARSPERACRE)...................................................................................................................................NETPRESENTVALUE(NPV)$511.61EQUIVALENTANNUALINCOME(EAI)$34.02SOILEXPECTATIONVALUE(SEV)$1179.46BENEFIT/COSTRATIO2.14YEARSTOPAYBACKATDISCOUNT20YEARSREALINTERNALRATEOFRETURN8.01%NOMINALINTERNALRATEOFRETURN12.33%....................................................................................................................................1Therealandnominalinternalratesofreturnarecalculatedindependentofthespecifieddiscountrate.2AlthoughSoilExpectationValue(SEV)wascalculated,thiscriterionismeaninglessbecauseallSEVassumptionswerenotsatisfied.,7 Table4.Sensitivityanalysistoa10-percentchangeinindividualactivitycashflowsfortheredpinetimbermanagementalternative,asdeterminedbyTWIGS1SENSITIVITYANALYSIS(SENSITIVITYOFPERFORMANCETOA10%CHANGEININPUTVALUES)NOMINALDISCOUNTRATE=7.00%GENERALINFLATIONRATE=4.00%(INVESTMENTLENGTH=21YEARS)](ALLMONETARYVALUESAREINBASEYEARDOLLARSPERACRE)ITEMCHANGEDNPVCHANGEEAICHANGESEVCHANGE.......................................................................................................................................BuyLand$30.00$2.00$69.16PropertyTax$1.44$.10$3.33SalePrep.$10.18$.68$23.47SaleAdmin.$3.45$.23$7.94SellLand$16.99$1.13$39.16SALEINCOME$8.30$.55$19.12SALEINCOME$70.95$4.72$163.561AlthoughasensitivityanalysisforSoilExpectationValue(SEV)wasperformed,thevaluesdispl

15 ayedaremeaninglessbecauseallSEVassumptio
ayedaremeaninglessbecauseallSEVassumptionswerenotsatisfied.Althoughthe"buyland"activityhasthesecondInotherwords,eveniftheabovechangesweretooc-highestsensitivityshownintable4,theinvestorneedcur,theoverallinvestmentdecisionbasedonNPVnotbeoverlyconcernedaboutthepotentialimpactwouldremainthesamebecausetheinvestmentontheinvestment'sprofitability.Thiscashflowoc-becomesattractiveinageneralsensewhenNPViscursatthebeginningoftheinvestmentperiodandgreaterthanorequaltozero.wasestimatedwithcertainty.SometimesitisusefultoknowhowmuchchangeInadditiontorelativeimpactsontheinvestmentisnecessaryinoneormorecostsand/orrevenuestoperformancemeasures,specificimpactscanalsobechangetheinvestmentdecision.Thisinformationiscalculated.Forexample,NPVfortheinvestmentwasshownintable5usingNPVastheinvestmentper-calculatedtobe$511.61/acre(table3).Iftheannualformancemeasurewithpercentchangecalculateduppropertytaxescostshaddecreasedby10percenttoto100percent.Inthisexample,theinvestormight$0.81/acre,NPVwouldbe$511.61+$1.44orwishtoknowhowmuchrevenuesreceivedfromthe$513.05/acre.ThesamelogicholdsforEAIandSEV.clearcutin2007mustdecreasetocauseNPVtoequalOntheotherhand,ifpropertytaxeshadincreasedzero.ThisisdeterminedbydividingNPV(table3)10percentto$0.99/acre,NPVwoulddecreasebybythecorrespondingchangeinthatmeasure(table_iby$1.44to$510.17/acre.4),andthenmultiplyingtheresultby10percent(thepercentchangespecifiedintable4).Using2007clear-ChangesinNPV,EAI,andSEVfromvariationscuttingincomeandNPVasanexample,theresult_inseveralcostand/orrevenuecashflowscanalsobeisthefollowing:calculateddirectlyfromtable4.Forexample,a50-percentincreaseinpropertytaxeswouldlower$511.61/$70.95=7.211"10percent=72.11percentNPVbyfivetimestheamountofa10-percentpro-pertytaxincrease(fivetimes$1.44or$7.20/acre).Inotherwords,adecreaseof72.11percentfor2007CombinationsofanynumberofcashflowvariationsclearcuttingincomewouldresultinaNPVofzero.c

16 analsobecalculated.Forexample,ifallcosts
analsobecalculated.Forexample,ifallcostswereThatis,NPVwouldequalzeroifthe2007clearcut-10percenthigherandallrevenueswere15percentringcashflowwerereducedfrom$2,745.51tolowerthantheestimatesusedintheanalysis,NPVwouldequal$511.61-$30.00-$1.44-$10.18-$765.72.Theclearcutin2007istheonlyactivitythatwouldrequirelessthana10(_percentchangeincash$3.45-1.5($16.99+$8.30+$70.95)=$322.18/acre.'8,,_,,_f,rr'1.............[.......[•III1_IkIIIII Table5.Sensitivityanalysisshowingthepercentchangeinindividualactivitycashflow,uptoamaximumof100percent,requiredtomakenetpresentvalueexactly$0.00fortheredpinetimbermanagementalternative,asdetemlinedbyTWIGSRISKANALYSIS(INPUTVALUECHANGESWHICHWILLMAKENPVEXACTLYEQUALTO$0.00)NOMINALDISCOUNTRATE=7.00%GENERALINFLATIONRATE=4.00%(INVESTMENTLENGTH=21YEARS)(ALLMONETARYVALUESAREINBASEYEARDOLLARSPERACRE)ITEMCHANGEDPERCENTCHANGEDOLLARCHANGE.......................................................................................BuyLand100.00%V;-.............;3ii;_;;...........................PropertyTax100.00%$-14.43SalePrep.100.00%$-101.80SaleAdmin.100.00%$-34.46SellLand-100.00%$-169.87SALEINCOME-100.00%$-82.95SALEINCOME-72.11%$-511.61NOTE:WHENPERCENTCHANGEEQUALS100%ANDDOLLARCHANGEISSMALLERTHAN$511.61,THEINPUTVARIABLEWILLNOTALTERTHEOVERALLINVESTMENTSELECTION,GIVENTHECURRENTDECISIONCRITERIA.flowtoreduceNPVtozero.Asanexample,ifannualtheactualgrowthandyieldsdifferfromonelocationpropertytaxesincreaseby100percent(i.e.,double)toanotherandTWIGSonlyprovidesanestimateofto$1.80/acreYyear,NPVwoulddecreaseby$14.43/acretheregionalaverage.Also,becauseTWIGSonlyper-to$497.18/acre.Similarcalculationscanalsobeper-formsabefore-taxanalysis,theinvestorwouldbewiseformedforEAIandSEVusinginformationpresentedtoexaminetheimplicationsoftaxontheinvestment'sintables3and4.performance.Thisinformation,combinedwiththeeconomicperformancedata(table3),shouldbeevaluatedwhencomparingthis

17 alternativetootherInvestmentAnalysisDeci
alternativetootherInvestmentAnalysisDecisionmakingpotentialinvestmentalternatives.TheinvestorshouldperformsimilaranalysesforBasedsolelyonanassessmentofinvestmentper-otherinvestmentalternatives.Someofthesealter-formancemeasures(table3),theinvestormaydecidenativesmightinvolvedifferentmanagementtoimplementthisalternative.However,sensitivityscenariosforthesametimberstand.Theriskandanalysisindicatesthatinvestmentperformanceisuncertaintyassociatedwitheachalternativeshouldsomewhatsensitivetochangesinestimatedrevenuesbeassessedandcompared.fromtheclearcutinyear2007.Beforeperformingtheanalysis,theinvestorandforesterdeterminedthatAninvestorwhofavorssafeinvestments(arisk-the2007clearcuttingincomecashflowestimateisaverseinvestor)wouldprobablyavoidourexampleveryuncertain(AppendixC).Ifanycombinationofalternativeinfavorofaninvestmentyieldingasecurefactors,suchaspoormarkets,decreasedyield,disease,7-percentnominalrateofreturn.Investorswhoseekorlowerratesofrealstumpagepriceincrease(lessreturnsgreaterthanasecure7-percentnominalratethanthe1.2annualpercentagerateassumed)wereofreturn,eveniftheriskisgreater(risk-neutralortocauseestimatesforthiscashflowtodecreasebyrisk-seekinginvestors),wouldprobablychoosetoin-morethan72.11percent,NPVwouldbelessthanvestinthe40-acretractofland.Ifso,theinvestorzero.Anyincreasesincostactivitycashflowswithoutshouldmonitortheinvestmentbothduringim-anincreaseinrevenueswouldfurtherreducethisplementationandeveryyearbefore2007.percentage.Theinvestorshouldalsoconsiderthat LITERATURECITEDu.s.Gen.Tech.Rep.NC-St.Paul,MN:U.S.DepartmentofAgriculture,ForestService,NorthBelcher,DavidM.1982.TWIGS:thewoodman'sidealCentralForestExperimentStation.p.(Inprel_)growthprojectionsystem.In:Proceedings,MinnesotaDepartmentofNaturalResources.1986.Mi_mputers:anewtoolforforesters;1982MayPublicstumpagepricereview.St.Paul,MN:Min-I8-20;WestLafayette,IN.SAFPubl.82-05.Westnesota:Depa

18 rtmentofNaturalResources,DivisionLafayet
rtmentofNaturalResources,DivisionLafayette,IN:PurdueUniversity:70-95.ofForestry.7p.Blinn,C.R.;Hendricks,L.T.1985.MarketingtimberRose,D.W.;Blinn,C.R.;Brand,G.J.1988.Guidefromtheprivatewoodland.CD-FO-2723.St.Paul,toforestryinvestmentanalysis.Res.Pap.NC-MN:UniversityofMinnesota,MinnesotaExten-St.:Paul,MN:U.S.Depm-tmentofAgriculture,sionService.12p.ForestService,NorthCentralForestExperimentMiner,C.L.;Walters,N.R.;Belli,M.L.1988.AStation.p.(Inprep.)technicalguidetoTWIGSfortheNorthCentral10 APPENDIXASUMMARYOFPUBLISHEDSTUMPAGEPRICEREVIEWSFORTHENORTHCENTRALREGIONi,2StateTitleSourcePublications/YearIllinoisIllinoisTimberPricesILDept.ofAgriculture2SurveyBox19283Springfield,IL62794-9283IndianaForestProductsMarketingDept.ofForestryand4andWoodUtilizationNaturalResourcesReportPurdueUniversityWestLafayette,IN47907MichiganTimberMart-NorthF.W.Norris4P.O.Box1278Highlands,NC28741Minnesota3PublicStumpagePriceMNDNRDiv.ofForestryiReview500LafayetteRoadSt.Paul,MN55155Missouri4MissouriLogMarketExtensionForester4ReportUniv.ofMissouri-ColumbiaSchoolofForestry1-34Ag.Bldg.Columbia,MO65201WisconsinForestProductsExtensionForester2PriceReview-BoltwoodDepartmentofForestry(eachbulletin)Edition(BoltwoodPrices)UniversityofWisconsinandTimberEdition1630LindenDrive(SawtimberPrices)Madison,WI53706IIowadoesnotregularlypublishstumpagepricereviews.2Theremaybeacostassociatedwithreceivingsomeofthepricereviews.3Onlystumpagepricesfrompublictimberlandarereported.4Onlydeliveredpricesatthemillarereported.Loggingandtransportationcostswouldneedtobedeductedfromthereporteddatatodeterminestumpageprices.11{Nil{{{{ii......IIillI,,,,,,,,,,,,ram,,,,,,,,,,,,,,,,,,,,,,,,,,,,, APPENDIXBINVESTMENTANALYSISPREPARATIONFORMAnalyst'sName:Date:/_/i._D_ripti_BaseYearforAnalysis:LastYearinWhichanActivity_:InvestmentSize(acres):RealDiscountRate:mpercento__rNominalDiscountRate:MpercentandG_neralInflationRate:__percent2.Activi

19 tyDescriptionsNumberofCostActivities:Num
tyDescriptionsNumberofCostActivities:NumberofRevenueActivities:AnnualTypeInflationofYear(s)CashFlowDegreeofActivityRate_-ofinBaseYearConfidenceName(PercentI)rence2OccurrenceDollars3inEstimate4CommentsIThepercentbywhichtheactivity'sinflationrateisdifferentfromthegeneralinflationratespecifiedabove.2Single(S),annual(A),orperiodic(P)cocurrence.3Entercashflowsonaper-acrebasiswithaminus(-)signforcostsandaplus(+)signforreceipts.4Certain(C),fairlycertain(FC),uncertain(UC),highlyuncertain(HU).Theanalystmayalsochoosetoenterarangeorothermeasureofvariability.12............................Ii[III.....[I[I/lIlil'l[]/[l[[III1[11[l[ll............I1IIIIIIIII APPENDIXB.Irrvestmentanalysispreparationform(continued)Analyst'sName:Date:...........//_AnnualTypeInflationofYear(s)CashFlowDegreeofActivityRateOccur-ofinBaseYearConfidenceName(PercentI)rence2OccurrenceDollars3inEstimate4CommentsiThepercentbywhichtheactivity'sinflationrateisdifferentfromthegeneralinflationratespecifiedabove.2single(S),annual(A),orperiodic(P)oco/rrence.3Entercashflowsonaper-acrebasiswithaminus(-)signforcostsandaplus(+)signforreceipts.4Certain(C),fairlycertain(FC),uncertain(UC),highlyuncertain(HU).Theanalystmayalsochoosetoenterarangeorothermeasureofvariability.18 APPENDIXCECONOMICINPUTSFORTHEANALYSISOFA56-YEAR-OLDREDPINESTANDAnalyst'sName:R.ForesterDate:12/15/87i._D_criptionBaseYearforAnalysis:1987LastYearinWhichanActivityOccurs:2007InvestmentSize(acres):40AcresRealDiscountRate:upercento__rNominalDiscountRate:_/7percentandGeneralInflationRate:_44percent2.ActivityDescriptionsNumberofCostActivities:4NumberofRevenueActivities:3AnnualTypeInflationofYear(s)CashFlowDegreeofActivityRateOccur-ofinBaseYearConfidenceName(PercentI)rence2_enceDollars3inEstimate4CommentsBuyLand0S1987-300.00C--PropertyEstimatesre-Taxes0A1987-2007-0.90FCliablefornearfutureonly.SaleEstimatesre-___.0P1987-65.00UCliablefornearfutureonly.2

20 007-65.00Dependentoncost&avail-abilityof
007-65.00Dependentoncost&avail-abilityoflabor1Theperce_tbywhichtheactivity'sinflationrateisdifferentfromthegeneralinflationratespecifiedabove.2Single(S),annual(A),orperiodic(P)_ence.3Entercashflowsonaper-acrebasiswithaminus(-)signforcostsandaplus(+)signforreceipts.4Certain(C),fairlycertain(FC),uncertain(UC),highlyun__in(HU).Theanalystmayalsochoosetoenterarangeorothermeasureofvariability.14 APPENDIXC._cinputsfortheanalysisofa56-year-oldredpineAnalyst'sName:R.ForesterDate:12/15/87D criptiAnnu__!InflationofYear(s)CashFlowDegreeofActivityRateOccur-ofinBaseYearConfidenceName(PercentI)rence2OccurrenoeDollars3inEstimate4CommentsSaleEstimatesre-Admin.0P1987-22.O0UCliablefornearfutureonly.2007-22.00Dependentoncost&avail-abilityoflaborSellUncertaintyinLand0S2007+300.00HUfuturemarketforland.SaleIncome51.20S1987+82.95FC--SaleUncertaintyinIncome5i.20S2007+987.07HUfuturepricesandmarkets1Thepercentbywhichtheactivity'sinflationrateisdifferentframthegeneralinflationratespecifiedabove.2Single(S),annual(A),orperiodic(P)occurrence.3Entercashflowsonaper-acrebasiswithaminus(-)signforcostsandaplus(+)signforreceipts.4Certain(C),fairlycertain(FC),uncertain(UC),highlyuncertain(HU).Theanalystmayalsochoosetoenterarangeorothermeasureofvariability.5SaleincomerevenuesareautomaticallycalculatedbytheEOONsubroutineinTWIGSandenteredintothediaryofcostandrevenueactivities.15i! Blinn,CharlesR.;Rose,DietmarW.;BeUi,MoniqueL.1988.GuidetoanalyzinginvestmentoptionsusingTWIGS.Gen.Tech.Rep.NC-123.St.Paul,MN:U.S.DepartmentofAgriculture,ForestService,NorthCentralForestExperimentStation.15p.DescribesmethodsforanalyzingeconomicretumofsimulatedstandmanagementalternativesinTWIGS.Definesanddiscussesnetpresentvalue,equivalentannualincome,soilexpectationvalue,andrealvs.nominalanalyses.Discussesriskandsensitivityanalysiswhencomparingalternatives.KEYWORDS:Economicanalysis,simulation,financialuncertainty,sensit