Net Present Value NPV for a Single Rotation

Net Present Value (NPV) for a Single Rotation • NPV may include the initial cost of 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 = 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

• 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

• 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)

SEV timeline PV 1 1 st rotation PV 0 of perpetual series PV 2 2 nd rotation PV 3 3 rd rotation PV 1 = PV 2 = PV 3 = ………PVn nth rotation

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

• 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

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

Zobrist KW, WSU Extension Manual, EM 030

• 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