Tree Values Assignment

Project Assignment AFM

Topic: Case Study:

(Tree Value)

Submitted To, Sir M.Akbar Khan

Submitted By, Waseem Ali 01-120091-082 MBA 3 ‘B’

Dated: 27-08-2010

Bahria University Islamabad

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Tree Values Introduction: Mr. Smith was a person who owns a forest land which was inherited by his father. He was only interested for his land to be is his asset, beside that he checked on prices of land in that area. The value of his land was increased by some of the trees that were high quality timber. Ms Bennett was a specialist who helps him in suggesting and to make decision whether to cut the trees presently of not. Logger was interested in timber and proposed Mr. Smith to cutting the trees that were 12” DBH. As timber was a high volume business the prices for standing timber were in dollar per thousand MBF. Value of trees depends on (i) Usable timber (ii) trees Quality / grade. The trees which were above 12” DBH and 60 Board feet were consider good and value worth, but below 12” the wood was not of commercial value. Trees growing rate in the New England was: Good quality hardwood grows 2” in diameter in 10 years . Inferior quality grows ½” in diameter in 10 years. Further tree value also depended on Increase in timber prices i.e. Price increased over last 20 years steadily and likely to continue. Currently increasing 1-3% above rate of inflation. There were 300 trees per acre on property. Ms. Bennett’s Estimates: In 40 acres of land there were about 60 crops tree per acres. Which were evenly divided into 12” and 14”. There were mostly grade 4 trees according to size & conditions. Ms. Bennett’s Suggestions: (i) He should consider thinning cutting about half of the 12” and 14” trees. This will allow to grow 1” in diameter in 5 years. Situations for Cutting Trees: 1- Cutting the trees that were 12” DBH 2- Leave the unwanted crops to grow in future and cut the less desired trees.

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Data for valuing tree with respect to forest industry: 1234-

CAPM NPV Rate of inflation Growth rate

Formula: Rf = 7.10 Rm = 6.20 B = 0.85 CAPM: R j = Rf + b ( Rm - Rf ) Rj = 6. 47% Total area of the forest land Combine total of tree Includes 12” DBH Includes 14” DBH

40 acres 60 30 30

Grades for the trees with respect to 12” and 14” is grade “4” The probability of growing trees according to grade is Tree grade

4 to 3

Trees unthinned, unmanaged forest land Trees thinned, managed forestland

60% 80%

Ms. Bennett’s Suggestions: Thinning cutting about half of the 12” and 14” trees. This will allow to grow 1” in diameter in 5 years.

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The average hardwood prices by tree grades are:

Tree grade

$MBF

4 3 2 1 Veneer

40 120 260 445 845

Now we will consider according to the knowledge which I have gathered by going through this case analysis there are two situations for cutting trees as mentioned above which was suggested by Ms. Bennett i.e. 1-Cutting the trees that were 12” DBH 2-Leave the unwanted crops to grow in future and cut the less desired trees.

Now we will consider the above two suggested situations and see which one is desirable and valuable for maximization profit by cutting trees.

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Conclusion: Mr. smith now can easily determine that what value he will get in future by cutting trees of 12” & 14” DBH. On our calculation it can clearly be seen that if Mr. smith allows logger to cut all the trees of 12” and 14” presently then he will get $18.2 million. But if he let them grow and thinning done properly and managing them after 5 years the trees will go to increase their grade with greater productivity and handsome amount. So the best option for Mr. smith is to cut the trees after 5 years and for now use the unmanaged, unthinned wood and sale them for the use of fire purpose.

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