You are looking to buy a tract of land for plantation management. You find two a

Question

You are looking to buy a tract of land for plantation management. You find two available pieces of land in the region. All thinnings will produce pulpwood. Use the following information to answer the questions.

Tract #1

Current age of Rotation: 27 years

Planting Costs: $125/acre

Tax and Management Fees: $8/ac/yr

Thinning Volume (age 18): 51.38 tons/acre

Thinning Volume (age 25): 96.3 tons/acre

Thinning Cost (age 18 & 25): $300/acre

Final Harvest Volume (age 35): 29.8 MBF/acre

Final Harvest Cost: $600/acre

Time of Harvest Pulp Price: $16/ton

Time of Harvest Sawtimber price: $448/MBF

Discount Rate: 8%

Total Acreage: 850 acres

Listing Price: $6,325,000

Tract #2

Current age of Rotation: 29 years

Planting Costs: $85/acre

Tax and Management Fees: $7/ac/yr

Thinning Volume (age 18): 22.67 tons/ac

Thinning Volume (age 25): 80 tons/ac

Thinning Cost (age 18 & 25): $400/ac

Final Harvest Volume (age 35): 32.5 MBF/ac

Final Harvest Cost: $350/acre

Time of Harvest Pulp Price: $12/ton

Time of Harvest Sawtimber Price: $478/MBF

Discount Rate: 8%

Total Acreage: 700 acres

Listing Price: $6,700,000

A) Which tract has a higher land value? Why?

B) Which piece of land is the better deal? Why? (Hint: Consider the standing timber in addition to the land to evaulate the seller's estimation of value)

C) Which piece of land would you buy and why?

Explanation / Answer

Tract 1 has a higher land value as it has a higher NPV

Present Value = Cashflow / ((1 + discount rate) ^ number of years)

NPV = sum of all the Present values.

At Present cashflow = Cost of land + Planting cost

Every year fixed cashflow = Fees

Cashflow at the 18 and the 25 year = Sale of Pulp - Thinning cost - Fees

Cashflow at the 35 year = Sale of timber - Harvest cost - Fees

Answer for every question is the same - Tract 1 as it has a higher NPV

Tract 1 Year Cashflow Discount PV NPV 0 -6431250 8% -$6,431,250.00 -$5,512,434.04 1 -6800 8% -$6,296.30 2 -6800 8% -$5,829.90 3 -6800 8% -$5,398.06 4 -6800 8% -$4,998.20 5 -6800 8% -$4,627.97 6 -6800 8% -$4,285.15 7 -6800 8% -$3,967.73 8 -6800 8% -$3,673.83 9 -6800 8% -$3,401.69 10 -6800 8% -$3,149.72 11 -6800 8% -$2,916.40 12 -6800 8% -$2,700.37 13 -6800 8% -$2,500.35 14 -6800 8% -$2,315.14 15 -6800 8% -$2,143.64 16 -6800 8% -$1,984.86 17 -6800 8% -$1,837.83 18 436968 8% $109,350.82 19 -6800 8% -$1,575.64 20 -6800 8% -$1,458.93 21 -6800 8% -$1,350.86 22 -6800 8% -$1,250.80 23 -6800 8% -$1,158.14 24 -6800 8% -$1,072.36 25 1047880 8% $153,009.24 26 -6800 8% -$919.37 27 -6800 8% -$851.27 28 -6800 8% -$788.21 29 -6800 8% -$729.83 30 -6800 8% -$675.77 31 -6800 8% -$625.71 32 -6800 8% -$579.36 33 -6800 8% -$536.44 34 -6800 8% -$496.71 35 10831040 8% $732,552.44 Tract 2 Year Cashflow Discount PV NPV 0 -6759500 8% -$6,759,500.00 -$6,062,862.30 1 -4900 8% -$4,537.04 2 -4900 8% -$4,200.96 3 -4900 8% -$3,889.78 4 -4900 8% -$3,601.65 5 -4900 8% -$3,334.86 6 -4900 8% -$3,087.83 7 -4900 8% -$2,859.10 8 -4900 8% -$2,647.32 9 -4900 8% -$2,451.22 10 -4900 8% -$2,269.65 11 -4900 8% -$2,101.53 12 -4900 8% -$1,945.86 13 -4900 8% -$1,801.72 14 -4900 8% -$1,668.26 15 -4900 8% -$1,544.68 16 -4900 8% -$1,430.26 17 -4900 8% -$1,324.32 18 -94472 8% -$23,641.53 19 -4900 8% -$1,135.39 20 -4900 8% -$1,051.29 21 -4900 8% -$973.41 22 -4900 8% -$901.31 23 -4900 8% -$834.54 24 -4900 8% -$772.73 25 387100 8% $56,523.53 26 -4900 8% -$662.49 27 -4900 8% -$613.42 28 -4900 8% -$567.98 29 -4900 8% -$525.90 30 -4900 8% -$486.95 31 -4900 8% -$450.88 32 -4900 8% -$417.48 33 -4900 8% -$386.56 34 -4900 8% -$357.92 35 10624600 8% $718,589.96

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