Forest Management and Planning

Chapter 2. Valuing and Characterizing Forest Conditions

1. Mean annual increment, periodic annual increment. Suppose you are given the following
expected growth information for a stand in the following table. You are interested in
determining the optimal rotation age for this stand. Given the following information, what is the
mean annual increment? What is the periodic annual increment? What is the optimal rotation
age?
Mean
annual
increment
(ft3/ac/year)

Periodic
annual
increment
(ft3/ac/year)

18
355
1,318
2,622
3,735
4,395
4,675
4,611
4,368
4,060

3.6
35.5
87.9
131.1
149.4
146.5
133.6
115.3
97.1
81.2

67.4
192.6
260.8
222.6
132.0
56.0
-12.8
-48.6
-61.6

Year

Total
volume
(ft3/ac)

5
10
15
20
25
30
35
40
45
50

The optimal rotation age using a rule of maximizing the mean annual increment is about 25
years, perhaps 26 or 27, once we have graphed the data above and estimated where the PAI
and MAI curves intersect.
2. Bare land value. What is the value of bare land, if used with even-aged management to
produce a perpetual series of identical timber rotations? You have initial stand establishment
costs of $125/acre and a harvest income of $12,500/acre in 35 years. Assume a 5 percent real
discount rate.
The future value of the planting investment is $125 (1.05) 35 = $689.50

NR

1 i 1

SEV

$12,500 $689.50

SEV

1.05 35 1

$2,615.25 per acre

3. Economic assessments. Suppose that you have 250 acres of cut-over land and you want to
evaluate the return from planting timber on the site. Assume that to prepare the site and plant
shortleaf pine it will cost $250 an acre. Assume that incidental management costs are $3 per
acre per year. Quail hunters will pay $5.35 per acre per year for hunting rights for plantations
five years old or less. At age 17, a selection thinning can generate $335 per acre. In year 34,
clear-cutting the tract can generate $2,765 per acre. If your discount rate is 4 percent, then
what is the net present value of this return?
Present value of the reforestation: $250 per acre

Present value of the management costs (terminating annual costs):

1.04 34 1
Present value $3
34
0.04 1.04

$55.23

Present value of the hunting rights (terminating annual revenue):

1.04 5 1
Present value $5.35
5

0.04 1.04

$23.82

Present value of thinning revenue:

Present value = $335 / (1.04)17 = $171.98
Present value of clearcut revenue:
Present value = $2,765 / (1.04)34 = $728.72
The net present value is then $728.72 + 171.98 + 23.82 - 55.23 - 250.00 = $619.29 per
acre
What is the B/C ratio?
Present value of benefits = $728.72 + 171.98 + 23.82 = $924.52
Present value of costs = $55.23 + 250.00 = $305.23
Benefit/cost ratio = ($924.52 / $305.23) = 3.03
In addition, if this is the optimal management regime, then what is the soil expectation value
based on this management regime?
The future value of the reforestation: $250 (1.04)34 = $948.58
The future value of the management costs:

Future value

$3 1.04 34 1
0.04

$209.57

The future value of the hunting rights (assuming paid at the end of the year):
Year 1: $5.35 (1.04)33 = $19.52
Year 2: $5.35 (1.04)32 = $18.78
Year 3: $5.35 (1.04)31 = $18.05
Year 4: $5.35 (1.04)30 = $17.35
Year 5: $5.35 (1.04)29 = $16.68
Total: $90.38
The future value of the thinning revenue: $335 (1.04)17 = $652.55
The future value of the clearcut revenue: $2,765.00

The net revenue at the end of the first rotation is: $2,765.00 + 652.55 + 90.38 - 209.57 948.58 = $2,349.78 per acre

$2,349.78

SEV

$840.91 per acre

1.04 34 1

4. Stocking guide for upland hardwoods. Using the stocking guide presented in Figure 2.12, if you
managed an upland hardwood stand that contained 1,200 trees per acre, which represented
80 ft2 per acre of basal area, what would be your estimate of the stocking level (qualitative and
quantitative), and the average diameter of the trees in the stand?
This is an overstocked stand, 105% stocked, with an average diameter of about 3.6 inches.
5. Stocking guide for upland hardwoods. Again using the stocking guide presented in Figure 2.12,
if you managed an upland hardwood stand that had an average DBH of 6 inches, and a basal
area of 90 ft2 per acre, what would be your estimate of the stocking level (qualitative and
quantitative) and the trees per acre within the stand?
This is a fully-stocked stand, about 93% stocked, containing about 450 trees per acre.
6. Rate of growth of deer populations. As a new forest manager, you learned that the deer
population on your property is currently 20 deer per square kilometer. Ten years ago, there
were 10 deer per square kilometer. Twenty years ago, there were 5 deer per square kilometer.
What is rate of growth for each period? What is the rate of growth for the past 20 years?
The difference between now and twenty years ago is 15 deer per square kilometer. Therefore,
the growth rate is 15/20 deer per year, or 0.75 deer per year.
The difference between now and ten years ago is 10 deer per square kilometer. Therefore, the
growth rate is 10/10 deer per year, or 1.0 deer per year.
The difference between ten years ago and twenty years ago is 5 deer per square kilometer.
Therefore, the growth rate is 5/10 deer per year, or 0.5 deer per year.
7. After-tax net present value of a hunting lease. Suppose you want to calculate the after-tax net
present value of a hunting lease over a 10-year period. The lease yields $10 per acre per year
and your yearly management costs are $3.75 per acre. If your alternative rate of return is 6.5
percent and your marginal tax rate is 30 percent, then what is your after-tax net present
value? What is your tax savings?
The formula for calculating an after-tax revenue is: (before-tax revenue) x (1- tax rate). If we
received $10 per acre in a year for a hunting lease and we faced a 30% marginal tax bracket,
then our after-tax revenue would be $7.00 per acre.
The formula for calculating an after-tax cost is: (before-tax cost) x (1- tax rate). If we paid
$3.75 per acre in a year in management costs and we faced a 30% marginal tax bracket, then
our after-tax cost would be $2.63 per acre. This lower cost reflects the $1.12 per acre tax
savings we would get from deducting this cost from our federal income taxes.
The formula for calculating an after-tax discount rate is: (before-tax discount rate) x (1- tax
rate). If the before-tax real discount rate is 6.5% and we faced a 30% marginal tax bracket,
then our after-tax discount rate would be 4.55%.
The net after-tax revenue over the ten-year period is: $7.00 - 2.63, or $4.37.
The present value of a terminating annual revenue is then:


Present value Annual CF

1 i t 1

i 1 i t

1.0455 1
Present value $4.37
10
0.0455 1.0455

10

Present value = $34.49 per acre

8. Benefit/cost ratio for road development. Suppose your company is studying a potential contract
with the federal government to construct a three-mile road prior to harvesting timber on a
public forest. You need to determine whether it is financially feasible to build this road prior to
harvesting the public timber. If calculating a benefit/cost ratio is your companys primary tool
for evaluating any contract, then what is the ratio if the expected present value of timber
revenues is $7,000,000 and the road building costs are $1,000,000 per mile? What does the
ratio tell you? Is the activity feasible? What if the expected yield from future timber harvest
were only $2,500,000 due to major errors in the pre-contract inventory? What does your
benefit/cost ratio say? How does it compare to the first scenario?
The present value of the revenues is $7,000,000. The present value of the costs is
$1,000,000. The benefit cost ratio is then 7.0 ($7,000,000 / $1,000,000). The ratio indicates,
since it is above 1.0, that the IRR is greater than the hurdle rate assumed, thus the activity is
feasible. If the present value of timber harvests were only $2,500,000, then the BCR would be
2.5, which does not compare favorably to the first scenario, even though the second scenario
still indicates that the IRR is greater than the hurdle rate assumed.
9. Assessment of corn or hybrid poplar investments. Suppose you are an extension forester trying
to give advice to a farmer in the Mississippi Delta. This farmer is trying to decide between
growing corn or establishing a short-rotation hybrid poplar plantation, to provide feedstock for
a newly established dual feedstock bio-ethanol refinery in Vicksburg, on his 100 acres of old
fields. On this land the farmer can yield 105 bushels of corn yearly and garner a price of $5.00
per bushel for his corn. If the farmer plants hybrid poplar, then he cant harvest the popular for
five years. At that time, the farmer is expected to yield 50 cords of wood per acre and garner a
price of $10 per cord. Which option would you recommend the farmer to take? Why? Would it
be wise to plant the entire 100 acres to only corn or trees or would it better to split up the
acreage? Assume that the farmer has a hurdle rate of 5.9 percent.
Tract size: 100 acres
Planning horizon: 5 years
Interest rate: 5.9%
Option 1: Plant corn
Yield per acre per year: 105 bushels
Price per bushel: $5
Expected revenue per acre per year: $525
Discounted revenues
Year 1: $49,575.07
Year 2: $46,813.10
Year 3: $44,205.00
Year 4: $41,742.21
Year 5: $39,416.63

Total: $221,752.02
Option 2: Plant hybrid poplar
Yield per acre: 50 cords
Price per cord: $10
Discounted revenues
Year 5: $37,539.65
Total: $37,539.65
We would advise the farmer that under the assumptions we have described, planting the land
in corn would be the best financial decision (it leads to a higher net present value). However, if
economic conditions change, the analysis should be revisited. Fortunately, the time horizon is
not very long, and shifts in land use can be made in a reasonable amount of time.
10. Terminating periodic net revenues. Suppose you need to evaluate and compare the cash
flows derived for a terminating periodic net revenue stream that ends in 20 years and a
perpetual periodic net revenue stream. If you were evaluating these two net revenue streams
on a present value basis, then what would you expect the relative values to be? In other
words, would you expect them to be the same? Why or why not? Assume periodic net
revenue of $500 that occurs every five years and a real risk-free alternative rate of return is
4.5 percent. After evaluating the results for the two revenue streams do you get the
relationship you expected from answering the first question? What happens if you add a 3
percent risk factor to your alternative rate of return? Do you get the same result? What
happens to the magnitude of your results?
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

Revenue

Discounted
Revenue (i = 4.5%)

Discounted
Revenue (i = 7.5%)

$500

$401.23

$348.28

500

321.96

242.60

500

258.36

168.98

500

207.32

117.71

$1,188.87
$2,031.02

$877.57
$1,147.76

NPV of terminating revenue stream

NPV of perpetual revenue stream

Relatively speaking, the NPV that terminates at 20 years should be lower than the NPV that
continues indefinitely, since the latter contains other revenues in years beyond the 20-year
time horizon. The difference is over $800.
When the higher interest rate is assumed, the relationship is the same, yet the difference
between the terminating NPV and the non-terminating NPV is much smaller (about $270)
because the revenues are discounted more heavily in this case.
11. Timing of activities in a forest plan assessment. Suppose that you have been asked by your
supervisor to estimate the net present value of potential management regimes across various
forest types prior to using them in a harvest scheduling analysis. If you have planning periods
of one year, then would it make much of a difference to plan activities at the beginning or end
of the period?
Since the value of activities (benefits and costs) in the first year will not be discounted
under the rule of planning them at the beginning of the time period, this assumption may
have an impact on the outcome of the plan (net present value) if the interest rate is high
and the revenues or costs are high as well. Further, planning activities to occur at the end
of the time period would seem conservative, where all revenues and costs are discounted
the full amount for that year.
What about the middle?
Assuming that activities will take place in the middle of the planning period may make more
sense. Since some will be implemented before the mid-point, and others after, and since
each will be discounted by at least 1/2 of a year, the impact of the interest rate assumption
may be mitigated.
Which one would be more practical? How would it affect your return?
As we noted above, the more practical assumption would be to discount the revenues and
costs from the mid-point of each planning period. The effect on the returns will depend on
the interest rate assumed and the revenues and costs realized. Perhaps a simple example
would help illustrate. Assume that the net revenues (revenue - cost) in the first year was
$100,000, and that the landowner's interest rate was 6%. Under the first assumption (plan
activities at the beginning of the time period), the discounted net revenue would be
$100,000. Under the second assumption (plan activities at the end of the time period), the
discounted net revenue would be $94,339.62 ($100,000 / 1.06 1). Under the third
assumption (plan activities in the middle of the time period), the discounted net revenue
would be $97,128.59 ($100,000 / 1.060.5).
What if your periods were longer, say five years or even 10 year long? What should you do?
Longer time periods would exacerbate the differences between the three assumptions. A
compromise would be to discount all revenues and costs from the mid-point of the time
period.
12. Diameter distribution. Develop a diameter distribution of the western stand described in
Appendix A, for ages 30 and 50. What can you tell about the stand from the diameter
distribution? How does it change over the 20-year time period?

The stand is a classic even-aged stand when it is both 30 and 50 years old. Over the 20-year
time period, the average diameter grows from about 9 inches to about 13 inches, at a rate of
about 0.2 inches per year.
13. Quadratic mean diameter. Assume that you manage a stand of red pine in Wisconsin. The
stand contains 145 ft2 of basal area per acre and 235 trees per acre. What is the quadratic
mean diameter of the trees in this stand?
The average basal area per tree in this stand is 0.617 ft2.

QMD (inches )

0.617 ft 2
10.6 inches
0.005454

14. Down woody debris. Given the following data from a 0.5 acre sample of a natural stand of 60year old pine trees in South Carolina, what is your estimate of the down woody debris (in cubic
feet per acre)?

Log
1
2
3
4
5
6
7

Small end Large end

diameter
diameter
(inches)
(inches)
6
5
10
8
9
5
12

8
9
13
9
12
8
14

Decay
class
I
II
II
III
I
III
II

To complete this exercise, we should have also given you the lengths of each log, for which
we apologize. Let's assume, however, that the lengths are 10 feet in all seven cases. We need
to square footage of the ends of each log, combined with the length of each log, to arrive at
cubic feet. First. let's average the small and large end diameters. Then, let's apply the basal
area formula to the average diameter to arrive at the average square footage of the ends of
each log (assuming now that the logs are cylinders).

Log
1
2
3
4
5
6
7

Small end Large end

diameter
diameter
(inches)
(inches)
6
5
10
8
9
5
12

8
9
13
9
12
8
14

Decay
class

Average
diameter
(inches)

Log end
area
(ft2)

I
II
II
III
I
III
II

7.0
7.0
11.5
8.5
10.5
6.5
13.0

0.267
0.267
0.721
0.394
0.601
0.230
0.922

We then multiply the log end areas by their respective lengths, and arrive at a total for this
plot: 34.02 cubic feet. Since the plot was only 0.5 acres, we need to expand the sample by
dividing 34.02 cubic feet by the size of the plot, and then arrive at an estimate of 68 cubic feet
per acre.
15. Site quality. Describe three different perspectives on site quality: the generalist, the
ecosystem-oriented, and the timber-oriented. Which of the three is most closely related to the
concept of a site index for a stand of trees, and why?
From page 26:
For timber production, site quality could be described by the amount of volume that can be
produced over a given amount of time.
An ecosystem-oriented approach to describing site quality would include describing the total
annual productivity arising from all plants, animals, bacteria, and so on, and used as an
expression of the potential of a site to produce biomass.
A generalist approach to describing site quality suggests that you would describe the capacity
of an area to produce forests or other vegetation, as it is influenced by soil type, topography,
and other physical or biological factors.
The timber-oriented approach is perhaps the most closely related to the concept of a site
index, since The taller the trees at the base age, the better the site index, and the higher the
volume per unit area.
16. Site index. A 40-year old stand of ponderosa pine in eastern Oregon has a SI 50 = 88. What
does this indicate about the stand, in general, and about the current height of the stand?
The dominant and co-dominant trees in the stand will be, on average, 88 feet tall when the
stand is 50 years old. Since the stand is currently less than 50 years old, the dominant and codominant trees in the stand are less than 88 feet tall.
17. Annual hunting lease. Assume that a landowner in north Florida leases out his or her property
to a hunting club, at a rate of $12 per acre per year. If the landowner uses a 6.5 percent
discount rate for the proposed investments, and the hunting lease covers a five-year time

period, what is the present value of the lease to the landowner? What is the future value of the
investment at the end of the five-year time period?
The present value of a terminating annual revenue is:

1 i t 1

Present value Annual CF

t
i

1.065 5 1
$49.89 per acre
Present value $12
5
0
.
065

1
.
065

The future value of a terminating annual revenue is:

annual revenue or cost 1 i t

Future value

$12 1.065

Future value

0.065

i
5

$68.32 per acre

18. Prescribed fire program. A landowner in North Carolina performs prescribed burning on his
land every three years. Assume that his alternative rate of return for investments is 5 percent,
and the program is assumed to continue indefinitely. If the first burn occurs now, what is the
present value of the prescribed burning program to the landowner?
Obviously, a prescribed fire cost needs to be assumed, so let's say it is $15 per acre.

Present value

CF pl

pl

$15

1 i

Present value

$95.16 per acre

1.05 1
3

If the first burn occurs three years from now, what is the present value of the burning
program?

Present value

CF pl

pl

1 i

Present value

$15

1 i

1.05

1.05 1
3

pl

$110 .16 per acre

19. Habitat enhancement program. A landowner in Alabama wants to enhance the red-cockaded
woodpecker habitat in one of her older pine stands by inserting man-made cavities in some
longleaf pine trees. She decides to spend $200 per acre every two years for the next 10 years
on this project. If the first cost is incurred at the end of the first two-year time period, what is
the present value of this program to the landowner? Assume that the alternative rate of return
for investments is 5 percent. What is the future value of this investment at the end of the
decade?

1 i 1

Present value CF pl
pl
t

10

1.05 1

Present value $200

2
10
1.05 1 1.05

$753.34 per acre

CF pl 1 i t 1

Future value

1 i 1
$200 1.05 1
1.05 1
pl

Future value

10

$1,227.11 per acre

20. Future value of an investment. Assume that you invested $1,000 today in a three-year
certificate of deposit that yields a 4.5 percent annual rate of return. Including the initial
investment, how much money will you have at the end of the three-year period?
$1,141.17
21. Selecting a discount rate. Assume that you are a forestry consultant in southern Illinois, and
you are developing a management plan for a private landowner. In the course of developing
the plan, you need to assess several alternative management prescriptions. The landowner
has never really considered the matter of discount rates for investments. How would you
arrive at a discount rate for use in assessing the landowners alternatives?
As we suggested on page 43, one could:
(1) Develop the suggested guiding discount rate to value forestland from recent averages of
10-year U.S. Treasury Note constant maturity rates, minus an inflation factor, plus a risk
premium.
(2) Develop the suggested guiding discount rate to value forestland from the weighted
average of the amount of interest they are paying on their ratio of debit and equity.
In either case, each organization develops a discount rate that is used in their economic
analysis of management alternatives. The discount rate may include aspects of expected price
inflation and may include a perceived risk factor.
22. Ecological assessments of alternatives. How could a typical forest inventory be used to
assess the impact of proposed management activities on wildlife habitat quality, stream
conditions, or recreation quality?
Many wildlife habitat models, stream temperature and sediment models, and recreation
models use characteristics of the surrounding forest to arrive at quantitative assessments of
these values. For example, it is common to find that basal area and tree (or snag) density in
habitat models developed for bird species. Further, average forest age is used in recreation
and wildlife habitat models. And, tree size, species, and density are used in stream
temperature and sediment models. While wildlife, recreation, and aquatic models may use
other information to quantitatively assess these values, a good portion of the information about
an area can be obtained from a typical forest inventory.