TREE VALUES Havard Business School

http://www.scribd.com/doc/77221222/Tree-Values http://www.studymode.com/essays/Tree-Value-Excel-945891.html?read_essay http://www.papercamp.com/essay/11828/Tree-Values-Case Section 1 – Executive Summary This report analyzes the case “Tree Values” to find an optimal way for Mr. Smith to manage his forestland and harvest the crop trees. The fundamental idea in this report is based on the concept of present value. A number of options are analyzed and the one with highest present value of pay off is considered. Questions 9, 10, and 11 give Mr. Smith 3 options: * Option 1: Harvest all crop trees now and receive $8,160 * Option 2: Let the forest grow without thinning, then harvest all crop trees 60 years from now and receive $537,962.01 at harvesting, equivalent to $28,800.08 now * Option 3: Thin and manage the forest, then harvest all crop trees 50 years from now and receive $670,033.56 at harvesting, equivalent to $58,429.42 now Based on the present value of the money received at harvesting, it is highly recommended that Mr. Smith should choose option 3. Furthermore, provided Mr. Smith decides to thin and manage his forest, in case he needs money soon to use for other purposes, he can harvest all of his crop trees at the 40th year to receive $410,608.68 at harvesting, equivalent to $58,325.19 at present, instead of waiting for 10 more years. This is because the present value of money received at the 40th year is just a little ($104.23) less than that of money received at the 50th year. Section 2 – Analysis Question 1 In order to choose the best offer, the amount of payment in each offer is discounted to present at the discount rate of 10%. This is just a basic discounting problem, using the formula PV=FV(1+r)t In this formula, FV is the amount of payment, r is the discount rate of 10%, t is the number of years from now in each offer. Table 1 in the appendix summarizes the present value of payment in each offer. It also shows that offer 8 has the highest payment’s present value of $140.61. Therefore, offer 8, which pays $274 seven years from now, will be chosen.

Sol2 Tree ValuesIntroduction: Mr. Smith was a person who owns a forest land which was inherited by his father.He was onlyinterested 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. MsBennett was a specialist who helps him in suggesting and to make decision whether to cut thetrees presently of not. Logger was interested in timber and proposed Mr. Smith to cutting thetrees 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 valueworth, but below 12” the wood was not of commercial value.

The case presents information toestimate the cash flows for each alternative. After estimating the corresponding cash flows, wewill have the opportunity to use discounted cash flow techniques to decide when to cut treesunder each strategy and to select which strategy maximizes the value of the forest. 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 intimber prices i.e. Price increased over last 20 years steadily and likely to continue. Currentlyincreasing 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 into12” 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 togrow 1” in diameter in 5 years. Situations for Cutting Trees :1-Cutting the trees that were 12” DBH2-Leave the unwanted crops to grow in future and cut the less desired trees.Data

for valuing tree with respect to forest industry:1-NPV2-Rate of inflation3-Growth rateIn order to choose the best offer, the amount of payment in each offer is discounted to presentat the discount rate of 10%. This is just a basic discounting problem, using the formulaPV=FV(1+ r ) tIn this formula, FV is the amount of payment, r is the discount rate , t is the number of yearsfrom now in each offer.