Question

You purchased forest for as an investment at a cost of $1,250 per acre as an investment to supplement your retirement income. After three years, you prune your trees at a cost of $100 per acre. You estimate your income from selective timber harvesting will be $3,000 per acre beginning 20 years after the trees are planted and occurring every 10 years thereafter in perpetuity. You have annual property taxes of $4 per acre starting next year. What is the present value of this investment, assuming a 6 percent discount rate?

Answer 1

Compounding rate   6%

Year	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21
Cost
Purchase	1,250.00
Pruning				100.00
Property tax		4.00	4.00	4.00	4.00	4.00	4.00	4.00	4.00	4.00	4.00	4.00	4.00	4.00	4.00	4.00	4.00	4.00	4.00	4.00	4.00	4.00
Incomes
Timber harvest*																					300.00	300.00
Net cash flows	(1,250.00)	(4.00)	(4.00)	(104.00)	(4.00)	(4.00)	(4.00)	(4.00)	(4.00)	(4.00)	(4.00)	(4.00)	(4.00)	(4.00)	(4.00)	(4.00)	(4.00)	(4.00)	(4.00)	(4.00)	296.00	296.00
PV of perpetuity**																					4,933.33
PV of first 19 years+ perpetuity	(1,250.00)	(3.77)	(3.56)	(87.32)	(3.17)	(2.99)	(2.82)	(2.66)	(2.51)	(2.37)	(2.23)	(2.11)	(1.99)	(1.88)	(1.77)	(1.67)	(1.57)	(1.49)	(1.40)	(1.32)	1,538.24
NPV of per acre	159.64

Notes-
*- Harvesting income is received every 10 years till perpetuity. For calculating ease, this income is assumed to the equally distributed every year starting from year 20.
**- Perpetuity is the net income from annualized harvest income after paying for the annual property tax. (harvesting income - property tax)