PROBLEM FOUR: 30 POINTS Suppose the landowner is forgoing harvesting $10,000 wor

Question

PROBLEM FOUR: 30 POINTS Suppose the landowner is forgoing harvesting $10,000 worth of timber today so that over the next 20 years the management could focus on wildlife in the project outlined in problem one That timber will be worth an additional $50,000 after twenty years, what is the rateo from letting the $10,000 of timber grow to a value of $50,000 in twenty years? Would this information increase the NPV and B/C ratio of the initial project? What would the new NPV and f return B/C ratios be?

Explanation / Answer

Present Value (PV) of Cash Flow: (Cash Flow)/((1+i)^N) i=Discount Rate=12%=0.12 N=Year of Cash Flow N Project Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Mark harvest for opening ($2,000) Establish food plots $      (10,000) Revenue from hunting lease $1,400 $1,400 $1,400 $1,400 $1,400 $1,400 $1,400 $1,400 $1,400 $1,400 $1,400 $1,400 $1,400 $1,400 $1,400 $1,400 $1,400 $1,400 $1,400 $1,400 Property taxes ($465) ($465) ($465) ($465) ($465) ($465) ($465) ($465) ($465) ($465) ($465) ($465) ($465) ($465) ($465) ($465) ($465) ($465) ($465) ($465) Harvest timber in openings $8,000 Removalof invasive and exotic plant ($8,000) Thining to improve specis composition $12,000 Thining to improve specis composition $20,000 A Net Cash Flow ($2,000) $         (9,065) $        935 $    8,935 $        935 $ (7,065) $        935 $        935 $        935 $        935 $ 12,935 $        935 $        935 $        935 $        935 $        935 $        935 $        935 $        935 $        935 $ 20,935 SUM B=A/(1.12^N) Present Value(PV)of net cash flows $      (2,000) $         (8,094) $        745 $    6,360 $        594 $ (4,009) $        474 $        423 $        378 $        337 $    4,165 $        269 $        240 $        214 $        191 $        171 $        153 $        136 $        122 $        109 $    2,170 $    3,147 NPV=Sum of PV of cash flows $         3,147 Benefits=Sum of PV of positive net cashflows $      17,250 Cost=Sum of PV of negative net cashflows $      14,103 B/C Ratio=Benefit/Cost Ratio= 1.22316417 -1 2/9 Foregoing $10,000 of harvest today will increae cost in year 0 by $10,000 asopportunity of foregoing $10,000 Present Value of additional $50,000 after 20 years= $         5,183 50000/(1.12^20) Increase in initial cost $10,000 Increase in Present Value of Benefit $         5,183 This will decrease the NPV The new NPV will be (3147+5183-10000) $      (1,669) The Benefit Cost Ratio will decrease The new B/C Ratio=(17250+5183)/(14103+10000)=               0.93 Rate of Return=r Future Value=10000*(1+r)^20=50000 (1+r)^20=50000/10000=5 1+r=5^(1/20)= 1.08379839 r=1.08379839-1= 0.08379839 Rate of return= 0.08379839 Rate of return in percentage 8.38%

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