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Financial analysis of growing koa

Financial analysis of growing koa. High present costs Revenues far in the future Markets changing. $100 at 5% compound interest will be worth $704 in 40 years. Discounting: The time value of money. $10,000 in 40 years at 5% discount is worth only $1,420 today.

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Financial analysis of growing koa

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

  2. $100 at 5% compound interest will be worth $704 in 40 years Discounting: The time value of money

  3. $10,000 in 40 years at 5% discount is worth only $1,420 today Discounting: The time value of money

  4. CalculateNet 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

  5. 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

  6. 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

  7. When to harvest? • Rotation length is an economic decision

  8. 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 ???

  9. Stumpage values depend on • Individual buyer and seller • Markets • Access to site • Quantity of timber • Quality of timber • Efficiency of harvesting operation

  10. Difficulty of predicting market values: koa stumpage ($/mbf) High estimate Low estimate

  11. Koa wood quality, thus stumpage value, increases with age

  12. Taxes • Income taxes • Cost-share programs • Timber harvests: capital gains • www.timbertax.org • Property taxes • Tree farms • Native forest • Inheritance taxes • Conservation easements

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