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Forest
Investment Analysis

There are many different factors to take into consideration when deciding whether or not to buy  timber land. Questions arise, such as: "Is this a good investment?" and "What kind of Pond surrounded by Forestreturn may I expect from my timber?"  It is very important that investors  analyze these and other factors in determining what action should be taken.

Most factors can be evaluated by combining a cash flow analyses with growth modeling and standard financial analysis techniques.  But an understanding of the complex resource is essential.

In addition to comprehending financial issues, growth projections may often be needed to compare the yield potentials of different timber management cycles, or to examine the effects of different site treatments on an existing parcel. Some predicted timber volume results may be used to construct relevant cash flow charts for comparing options of forest management with alternative investments.

There are several methods in which to express the results of cash flow analyses.  The chosen method depends on the client's particular needs. The alternatives are usually by:  NPV, LEV, and IRR  (also known as ROR).

  • NPV is the net present value of a finite series of costs and revenues at a chosen discount rate. It can be used to establish the "investment value" to a particular investor for pre-merchantable timber (most commonly pine trees that are too small to be marketed by a timber sale).
  • LEV stands for "land expectancy value" and it is the net present value of an infinite series of costs and revenues at a chosen discount rate. In other words, LEV is the amount a buyer could afford to invest in a given plot of bare land and achieve the specified discount rate of growing trees on that land. LEV can be used to calculate a maximum purchase price for cutover land based on soil productivity.  LEV may be expressed before taxes, or after taxes, as LEVAT.

  • IRR stands for internal rate of return and is also known as ROR or rate of return.  It is the discount rate that causes projected revenues to equal the cost of the project (net present value = 0). IRR represents the interest rate an investor may expect to earn on an investment and can be used to compare alternative investments or develop a reasonable value opinion during the "pre-merchantable" timber stand ages.

Ray Camp, Inc. assists in the process of choosing the  analysis method that is most appropriate for a client's specific needs.

 

Phone: (479) 968-7752
Fax:  479-968-2853
Dreinold@centurytel.net