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FERNANDO, Acting C.J.:

FERNANDO, Acting C.J.:

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CHAPTER 10

CASE STUDY IN FINANCIAL MODELLING AND SIMMULATION OF A

FORESTRY INVESTMENT

ANSWER TO REVIEW QUESTIONS

QUESTIONS

10.1 What are some of the difficulties in establishing cash flow estimates for long-

lived forestry projects?

10.2 What methods are available for allowing for risk in the evaluation of forestry

projects? Which of these methods are preferred?

10.3 In Example 10.1, the land used for the plantations was made available by a

local Council for FVC Ltd to use at no cost (see Box 1). Assume now that

FVC Ltd had to pay rental on the land from the council at the rate of 4% of the

land value per annum

(a) Using workbook 10.1, recompute the NPV assuming that FVC Ltd had to pay

an annual land rental and that the land value on average was $2000 per ha.

(b) What effect has payment had on IRR?

FVC Ltd must receive in order to achieve a NPV of .

ANSWERS

Answer to Q 10.1

The long investment period typical of forestry projects provides a number of challenges

when estimating cash flows. In particular, wood prices are likely to fluctuate over this

period and it is difficult to predict the price that will be obtained for timber when it is

harvested. The problems with forecasting wood prices thus poses a challenge in when

estimating cash inflows as part of the financial modeling process. Furthermore, there is

risk that technological change or fashion change could result in weak demand for some

timber types (e.g. satellite communications reducing demand for poles for phonelines,

consumer preferences’ for wood colour changing over time). Regulatory change in

response to changing community attitudes could increase costs and restrict areas which

can be harvested.

The long time required for trees to grow also means that there is sometimes a lack of

biological growth data that can be used to predict growth rates (and hence timber yield).

Timber yield and harvest timing are critical variables in forestry financial models. The

lack of such data is most critical when new (non-traditional) species are being used in

plantations for which there are no past history of cultivation. As seen in Chapter 4, the

Delphi and other group forecasting methods can be used to develop estimates of growth

and harvest ages which can be used in financial models.

The multiple-use nature of forests has also been recognized in the management of large

industrial and government plantation estates. These management practices can have

direct impact on the financial performance of the investment and thus should be

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CHAPTER 10 CASE STUDY IN FINANCIAL MODELLING AND SIMMULATION OF A FORESTRY INVESTMENT ANSWER TO REVIEW QUESTIONS QUESTIONS 10.1 What are some of the difficulties in establishing cash flow estimates for long-lived forestry projects? 10.2 What methods are available for allowing for risk in the evaluation of forestry projects? Which of these methods are preferred? 10.3 In Example 10.1, the land used for the plantations was made available by a local Council for FVC Ltd to use at no cost (see Box 1). Assume now that FVC Ltd had to pay rental on the land from the council at the rate of 4% of the land value per annum (a) Using workbook 10.1, recompute the NPV assuming that FVC Ltd had to pay an annual land rental and that the land value on average was $2000 per ha. (b) What effect has payment had on IRR? (c) Using the ‘goal seek’ function of Excel, calculate the final stumpage price that FVC Ltd must receive in order to achieve a NPV of . ANSWERS Answer to Q 10.1 The long investment period typical of forestry projects provides a number of challenges when estimating cash flows. In particular, wood prices are likely to fluctuate over this period and it is difficult to p ...
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