FORVAL (FORest VALuation) is a computer program for cash-flow analysis of forestry investments. The FORTRAN 77 program is available from the MAFES Forestry Department for Data General computers using the Advanced Operating System with Virtual Storage, and for IBM-compatible personal computers (send letter of request and 51!.-inch diskette to P.O. Drawer FR, Mississippi State, MS 39762)

Bullard, Steven H

Matney, T. G.

Straka, Thomas J.

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Stephen F. Austin State UniversitySFA ScholarWorksFaculty Publications Forestry1987FORVAL: A computer program for FORestVALuationSteven H. BullardStephen F. Austin State University, Arthur Temple College of Forestry and Agriculture, bullardsh@sfasu.eduThomas J. StrakaT. G. MatneyFollow this and additional works at: http://scholarworks.sfasu.edu/forestryPart of the Forest Sciences CommonsTell us how this article helped you.This Article is brought to you for free and open access by the Forestry at SFA ScholarWorks. It has been accepted for inclusion in Faculty Publicationsby an authorized administrator of SFA ScholarWorks. For more information, please contact cdsscholarworks@sfasu.edu.Recommended CitationBullard, Steven H.; Straka, Thomas J.; and Matney, T. G., "FORVAL: A computer program for FORest VALuation" (1987). FacultyPublications. Paper 126.http://scholarworks.sfasu.edu/forestry/126Vol. 12, No. 23 Research Report September 1987 (Reprinted December 1988) FORVAL: A Computer Program for Forest Valuation S. H. Bullard, T. J. Straka, and T. G. Matney FORVAL (FORest VALuation) is a computer pro-gram for cash-flow analysis of forestry investments. The FORTRAN 77 program is available from the MAFES Forestry Department for Data General computers using the Advanced Operating System with Virtual Storage, and for IBM-compatible per-sonal computers (send letter of request and 51!.-inch diskette to P.O. Drawer FR, Mississippi State, MS 39762). FORVAL is designed for use without a manual. Users simply answer questions displayed on the screen by the program. The following question is one of the first ones in the program; each of the options is briefly discussed below: What would you like to calculate? Enter: PV for the following Present Value criteria-Present Net Value, Equivalent Annual Income, BenefiVCost Ratio, and Internal Rate of Return FV tor Future Values of costs and revenues, LE for Land Expectation value, SF tor Sinf<ing Fund amounts, IP for Installment Payments, RC for after-tax present value of Reforestation Costs, or DA tor Depletion Allowances and after-tax timber sale income. The present value (PV) option is used for standard financial calculations. Any cash flow or forestry in-vestment can be analyzed. The results include net pre-sent value of the cash flow at a specified interest rate, Steven H. Bullard is assistant forester, and Thomas J. Straka and Thomas G. Matney are associate foresters, Mississippi Agricultural and Forestry Experiment Station. the equivalent annual income, the benefit/cost ratio, and the investment's internal rate of return. Any sort of payment series or annuity can be specified (ter-minating or perpetual annuities, and annual or periodic annuities). The options will be illustrated with examples from Bullard, Monaghan, and Straka (1986). A landowner asks you to determine the net present value of regenerating 40 acres. His alternative rate of return is 4% (net of inflation, as are costs and revenues in the examples). The investment is outlined below on a per acre basis: Type of Item Year Cost/Revenue Amount Establishment Cost 0 Single Sum $ 160.00 Annual Management & 'Th.x Cost 1·27 Annual $ -2.50 Thinning Revenue 16 Single Sum $ 97.50 Thinning Revenue 22 Single Sum $ 156.00 Harvest Revenue 27 Single Sum $1,287.00 The net present value of this investment is $363.41 per acre. This means the investment would earn a 4% rate of return, plus $363.41. The equivalent annual income is $22.25. The investment yields a net income equivalent to an annual income of $22.25 per acre per year over the 27-year rotation. The benefit/cost ratio is 2.81 to 1. At 4% interest benefits exceed costs by a factor of 2.8.1 to 1.00. The investment has an inter-nal rate of return of 8.7%. The future value (FV) option allows the user to compute the value of a single cash flow at a future date, considering a real rate of increase and an ex-pected inflation rate. ~~--------------------------------------------~ 5 MISSISSIPPI AGRICULTURAL & FORESTRY EXPERIMENT STATION Verner G. Hurt, Director Mississippi State, MS 39762 U Donak! W. Zacharias, President Mississippi State Univer-sity R. Rodney Foil, Vice President ______ ....;. _________ -.11 ---------jl OF S~~~AcFr~oNs f-1-------PV option Present Net Value Equiv_olent Annual Income ~- ___ _ Beneflf /Cost Ratio -Internal Rate of Return FV option Future Values of Cost And Revenues LE option Land Expectation Value SF option Sinking Fund Amounts IP option Installments Payments RC option Reforestation Costs DA option Depletion Allowances And Timber Sole Revenues After Taxes "------------ -Valuation Criteria Can Be Determined For Entire Rota-lions Or For Specific Silviculturol T:~me;:t~-1 $---- h Inflationary And Real Increases In Prices And Costs Can Be Projected --------$ $----Present Future Bare Land Value For Forestry Uses Of The Land= Present Value Of All Future Net lncom~-Londd-1$1 Value --------Rotation Rototion = #I #2 How Much Should You Save Each Year T~ Accumulate A Specific Amount? How Much Are Your Monthly Payments For A House, A Car Or Other Equipment? I Loan Payments I (Annual, Quarterly, Monthly) Effective Cost Of ReforestatiOn Is The After- Tax Present Value : ------------Reforestation Cost -Cost Shores -Present Value of Tax Savings from PL 96-451 ~Basis for Depletion* Timber Sale Revenue* -Depletion Allowance• - Taxes11(After for Timber Sale Depletion Allowance} Adjusted Basis for After- Tax Timber Depletion• Sale Revenue Iii *User Input 11 Program Output 2 A pine plantation was established 11 years ago at a cost of $120 per acre. Timber prices increased 3'12% annually in real terms (net of inflation) and the pre-commercial pine plantation value increased at the same rate. Inflation averaged 6% over the same period. What value should be assigned to the pre-merchantable plantation if the owner expects a market rate of return (the real3%% increase and the 6% inflation) for his investment? The future value op-tion shows a year 11 value of $332.57 per acre. Foster (1986) discusses pre-commercial timber valuation pro-blems like this. Land expectation value (the LE option) is the value of bare land if put into perpetual forest produc-tion. It is often called bare land value. The user in-puts all costs and revenues associated with a rotation of the forest, including establishment costs. Land cost is not included-land value is what the user is calculating. This option performs a fundamental calculation used in forest valuation-the value of bare land in permanent forest production. Consider a forest tract that presently has no mer-chantable timber. Following reforestation, the tract will be managed on a 30-year rotation and your real cost of capital is 6%. Site preparation and regenera-tion will occur in year 0 at a cost of $80 per acre. An-nual management costs and property taxes will be $1.50 per acre. Thinnings will occur at ages 18 and 25 and will yield 6 and 10 cords per acre. Pulpwood is worth $16 per cord. If you intend to follow the above management sequence in perpetuity and you want to earn at least 6% on your investment, how much can you afford to pay for the bare land? The LE option gives a bare land value of $156.26 per acre. This represents the maximum amount that could be paid for the land for forestry uses- if the required interest must be earned and if the timber values assumed are those actually expected for the property. The sinking fund (SF) option assumes you will put money into an account at the end of each year, begin-ning one year from the present, and that interest is compounded annually. It answers the question: "How much must be placed into an interest-bearing account annually to have a specified sum of money in a cer-tain number of yearsT' Sinking funds often involve equipment replacement. Suppose a $220,000 tractor must be replaced in 4 y~ars. If a 12% sinking fund is established to pay for the tractor in 4 years, how much is the annual pay-ment into the fund? The SE option gives a value of $46,031.70. The installment payment (IP) option calculates the payment that will pay off a loan in a specified period of time. This_nption can be used to determine mortgage payments, or automobile and other equip-ment payments. 3 Suppose you borrow $9,000 for a pickup truck and the dealer quotes you an annual percentage rate of 8.8%. What would your monthly payment be for 48 months? The IP option calculates a payment of $223.11. The reforestation cost (RC) option calculates the after-tax present value of regenerating a forest tract. For a given landowner, this represents the effective cost of the reforestation investment. Savings are deriv-ed from the tax incentives ofPL 96-451, and from cost-share assistance programs such as the Forest Incen-tives Program and Mississippi's Forest Resources Development Program. This option uses a set of assumptions that should apply to most nonindustrial private forest landowners: (1) total reforestation expenses, after cost-sharing, are less than or equal to $10,000 in a single year, (2) the landowner claims a 10% initial tax credit and amortizes 95% of the expense, (3) initial tax savings are immediate for expenses toward the end of a landowner's tax year, and (4) any cost-shares received are not included as tax-able income. This calculation gives a landowner the effective cost of reforestation- the cost after cost-sharing, after-taxes, and considering the time value of money. Problems of this type are discussed in Bullard and Straka (1985). Consider a $10,000 reforestation invest-ment at the end of the tax year by a forest farmer receiving 50% cost-sharing, with a 10% discount rate and a 28% marginal tax rate. The forest farmer can amortize over 7 years; i.e., he can write offhis expenses over 7 years. Thus, he reduces his taxes over the next 7 years. Also, he receives a 10% tax credit. The RC option shows that the forest farmer's effective cost of reforestation (after cost-sharing, after tax savings, and after the investment tax credit) is $3,528.75. TheDA option reports the depletion allowance, the adjusted basis for depletion, and the after-tax value of the revenue from a timber sale. The user in-puts the percentage of standing timber removed, the timber revenue generated, the landowner's marginal tax rate, and the current basis for depletion. Upon re-quest, the program will output the detailed calcula-tions used to derive the depletion allowance. Consider a timber sale that produces $200,000 of revenue. The timber owner has a marginal tax rate of 28%. The basis of the timber is $80,000. Half of the timber was removed from the tract. The DA option shows that the after-tax value of the timber sale revenue is $155,200 and the adjusted basis for deple-tion is now $40,000. FORVAL performs standard forest valuation calculations. It has both operational and instructional uses. If detailed instructions are requested, for exam-ple, all calculations are explained. For operational use, one of the questions early in the program allows you to choose abbreviated instructions. Literature Cited Bullard, S. H., T. A. Monaghan, and T J. Straka. 1986. Introduction to forest valuation and investment analysis. Mississippi Coop. Ext. Serv. Pub!. 1546. 131 p. Bullard, S. H., and T. J. Straka. 1985. What is your ~~ffective'' rate of reforestation cost? Forest Farmer 45(1):16-17. Foster, B. B. 1986. An alternative method for evaluating precommercial timber. The Consultant 31(2):29-32. Hatch Act Centennial 1887m1987 Mention of a trademark or proprietary product does not constitute a guarantee or warranty of the product by the Mississippi Agricultural and Forestry Experiment Station and does not imply its approval to the exclusion of other products that also may be suitable. Mississippi State University does not discriminate on the basis of race, color, religion, national origin, sex, age, or against handicapped individuals or Vietnam-era veterans. In conformity with Title IX of the Education Amendments of 1972 and Section 504 of the Rehabilitation Act of 1973, Joyce B. Giglioni, Assistant to the President, 610 Allen Hall, P. 0. Drawer J, Mississippi State, Mississippi 39762, office telephone number 325·3221, has been designated as the responsible employee to coordinate efforts to carry out responsibilities and make investigation of complaints relating to discrimination. 3789712M 

FORVAL: A computer program for FORest VALuation

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FORVAL: A computer program for FORest VALuation

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