Financial analysis of growing koa High present costs Revenues far in the future Markets changing.

Financial analysis of growing koa

• High present costs

• Revenues far in the future

• Markets changing

Discounting: The time value of money

• $100 at 5% compound interest will be worth $704 in 40 years

$0

$200

$400

$600

$800

0 10 20 30 40

Discounting: The time value of money

• $10,000 in 40 years at 5% discount is worth only $1,420 today

$0$2,000$4,000$6,000$8,000

$10,000

0 10 20 30 40

Years into future

Calculate Net Present Value

• Add up anticipated costs and revenues for each year

• Discount each year’s total back to present• Total • Positive? Go!• Negative? You’ll lose money

Real Interest/Discount Rate + Inflation = Nominal Interest Rate

• 5% real rate + 3% inflation = 8% nominal rate

• Nominal rate is what most other investments advertise

• Either put inflation into all calculations, or leave it out

Internal Rate of Return and

Net Present Value: Two sides of the same coin

• IRR is discount rate when NPV = 0

• Can use either to compare different projects

When to harvest?• Rotation length is an economic decision

Stumpage: the value of timber as it stands, uncut

• Value of the lumber less harvesting and processing costs

• Lumber = $15/board foot

• Stumpage = $5/board foot ???

Stumpage values

depend on

• Individual buyer and seller

• Markets• Access to site• Quantity of timber• Quality of timber• Efficiency of

harvesting operation

Difficulty of predicting market values: koa stumpage ($/mbf)

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000

1970 1980 1990 2000 2010

High estimate

Low estimate

Koa wood quality, thus stumpage value, increases with age

Taxes

• Income taxes– Cost-share programs– Timber harvests: capital

gains– www.timbertax.org

• Property taxes– Tree farms– Native forest

• Inheritance taxes– Conservation

easements