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 Copyright
 Title Page
 Table of Contents
 Introduction
 Steps in financial analysis
 Examples
 Issues in the analysis of your...
 Summary
 Literature cited






Group Title: Florida Cooperative Extension Service circular 836
Title: Estimating the profitability of your forestland enterprise
CITATION PAGE IMAGE ZOOMABLE PAGE TEXT
Full Citation
STANDARD VIEW MARC VIEW
Permanent Link: http://ufdc.ufl.edu/UF00049232/00001
 Material Information
Title: Estimating the profitability of your forestland enterprise
Series Title: Circular Florida Cooperative Extension Service
Physical Description: 13 p. : ill. ; 29 cm.
Language: English
Creator: Hubbard, William Gary, 1962-
Abt, Robert Carroll
Duryea, Mary L
Publisher: Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida
Place of Publication: Gainesville
Publication Date: 1989
 Subjects
Subject: Forests and forestry -- Multiple use -- Florida   ( lcsh )
Forest management -- Florida   ( lcsh )
Genre: government publication (state, provincial, terriorial, dependent)   ( marcgt )
bibliography   ( marcgt )
non-fiction   ( marcgt )
 Notes
Bibliography: Includes bibliographical references (p. 13).
Statement of Responsibility: William G. Hubbard, Robert C. Abt, and Mary L. Duryea.
General Note: Cover title.
General Note: "November 1989."
Funding: Florida Historical Agriculture and Rural Life
 Record Information
Bibliographic ID: UF00049232
Volume ID: VID00001
Source Institution: Marston Science Library, George A. Smathers Libraries, University of Florida
Holding Location: Florida Agricultural Experiment Station, Florida Cooperative Extension Service, Florida Department of Agriculture and Consumer Services, and the Engineering and Industrial Experiment Station; Institute for Food and Agricultural Services (IFAS), University of Florida
Rights Management: All rights reserved, Board of Trustees of the University of Florida
Resource Identifier: oclc - 21206124

Table of Contents
    Copyright
        Copyright
    Title Page
        Page i
    Table of Contents
        Page ii
    Introduction
        Page 1
    Steps in financial analysis
        Page 2
        Identify the objectives
            Page 2
        Determine the schedule of activities
            Page 2
        Attach dollar values to activities
            Page 2
        Discount values to the present
            Page 3
            Page 4
    Examples
        Page 5
        Example 1: Hunting leases
            Page 5
            Page 6
            Page 7
        Example 2: Pine straw production
            Page 8
        Example 3: Christmas trees
            Page 9
            Page 10
    Issues in the analysis of your enterprise
        Page 11
        Risk and the financial analysis
            Page 11
        Including taxes in the financial analysis
            Page 11
        Marketing
            Page 12
        Recordkeeping
            Page 12
        Using the computer in the financial analysis
            Page 12
        Assistance
            Page 12
    Summary
        Page 13
    Literature cited
        Page 13
        Page 14
Full Text





HISTORIC NOTE


The publications in this collection do
not reflect current scientific knowledge
or recommendations. These texts
represent the historic publishing
record of the Institute for Food and
Agricultural Sciences and should be
used only to trace the historic work of
the Institute and its staff. Current IFAS
research may be found on the
Electronic Data Information Source
(EDIS)

site maintained by the Florida
Cooperative Extension Service.






Copyright 2005, Board of Trustees, University
of Florida




. 1989 Circul

Estimating the Profitability

of Your

Forestland Enterprise


Hubbard,
Abt, and
Duryea
. .


Cen.rai Scienice
Library
FEB 2 8 1990
S y:".:.'iy of Florid


Eorida Cooperative Extension Service / Institute of Food and Agricultural Sciences / University of Florida / John T. Woeste, Dean
--


ar 836


William
Robert
Mary










Highlights

- If properly done, a financial analysis of your forest resource enterprise can be among the most valuable
tools used in the planning and decisionmaking process. Financial analyses give needed information on the
profitability of an enterprise, or provide assistance in choosing between two or more potential enterprises.

- Four steps are used in determining the profitability of the forest resource enterprise: 1) identify the extent
of the project and your objectives; 2) identify the complete schedule of activities involved in production; 3)
attach dollar values to all costs and revenues associated with the forest resource and; 4) account for the
"time value" of money by discounting future costs and revenues back to the present.

- Examples using hunting leases, pine straw, and Christmas tree operations are provided to illustrate the
steps involved in financial analyses.





CONTENTS


INTRODUCTION ...............................

STEPS IN FINANCIAL ANALYSIS ......................
1. Identify the Objectives ........... ................
2. Determine the Schedule of Activities ... ....... . ...
3. Attach Dollar Values to Activities ................. ...
4. Discount Values to the Present ........................

EXAM PLES ...................................
Example 1: Hunting Leases ............................
Example 2: Pine Straw Production ............ ...........
Example 3: Christmas Trees ... ..... ... .... ........ .

ISSUES IN THE ANALYSIS OF YOUR ENTERPRISE ........
Risk and the Financial Analysis ........................
Including Taxes in the Financial Analysis ...................
M marketing . . . . . . . . .
Recordkeeping...................................
Using the Computer in the Financial Analysis ................
A assistance . . . . . . . . .


SUMMARY .. ............ ........... ...

LITERATURE CITED ....................


. . . . .. 1

. . . . .. 2
. . . . .. 2
S.... .. ... 2
............ .... 2
. . . . .. 3

. . . .. .. 5
S. .. .. . . 5
. . . . . 8
. . . . . 9

. . . . . 11
. . . . . 11
. . . . . 12
. . . . .
. . . . . 12



. . . . 12
.1, .


. . . . . . . . 13

. . . . . . . . 13


William G. Hubbard is an Assistant in Forest Management and Extension Specialist; Robert C. Abt is Associate
Professor; and Mary L. Duryea is an Assistant Professor and Extension Specialist; Department of Forestry,
University of Florida, Gainesville, FL 32611.









INTRODUCTION

Forest and farmland owners today have a variety
of investment opportunities available to them on
their land. Depending on the characteristics of the
property, the interested owner can in addition to
growing trees, harvest pine straw, grow Christmas
trees or mushrooms, or even lease hunting, fishing,
or grazing rights. Some of these enterprises are
added as hobbies without high financial expecta-
tions. Many landowners however are interested in
the potential to increase income. This is especially
true for owners of forestland who must often wait
years before harvesting and selling timber.
When the landowner becomes interested in man-
aging an enterprise, a written management plan
should be prepared. Management plans include a
definition of objectives and level of involvement, an
analysis of the market situation for the enterprise
in question, a timetable of important activities, and
an identification of major factors that may limit the
success of the enterprise (Duryea, et al., 1988). The
management of a successful forestry enterprise
needs careful planning and decision-making, much
like the management of a successful business.
If a landowner is interested in making additional
income from the land, the management plan should


1(1
I I


include a financial analysis. If properly done, the
analysis can be among the most valuable tools used
in the planning and decision-making process. Finan-
cial analyses give needed information on the profita-
bility of an enterprise, or provide assistance in choos-
ing between two or more potential enterprises.
The purpose of this publication is to introduce the
landowner to the financial concepts necessary to
properly evaluate alternative forestry enterprises.
This publication emphasizes the financial benefits
and costs. However, landowners often undertake pro-
jects for a variety of reasons other than financial
return. These nonmarket objectives, such as manage-
ment for recreation, nongame wildlife habitat,
aesthetics, or soil conservation can also be included
in an analysis. Although the concepts are very simi-
lar, placing values on these benefits and costs can be
a time-consuming task. Methods for valuing these
are offered in Unpriced Values: Decisions Without
Market Prices (Sinden and Worrell, 1979).
After an introduction of the general steps involved
in financial analysis a number of detailed examples
will be examined. The costs and returns for the invest-
ments in the examples represent rough averages. The
costs and revenues for a potential enterprise should
be researched and estimated by the landowner and/or
a professional.


fI I






j


/



1'









STEPS IN FINANCIAL ANALYSIS
Sound financial analysis depends on a complete
accounting of costs and benefits over time. Keeping
track of the costs and revenues and when they occur
is important for management of cash flow. The timing
and amounts of these cash flows determine the pro-
fitability of the forest resource enterprise.
The flowchart in Figure 1 illustrates the steps taken
in the financial analysis.
1. Identify the Objectives
In the first step the owner's objective and level of
involvement are determined. This step may seem
straightforward. However, this is not always the
case. It is at this stage that you must ask yourself
how involved you want to be in the enterprise. Will
the project be a hobby or do you wish to make it
your major line of work? How much time do you
want to devote to the project? How much are you
willing to invest? Because the amount of involve-
ment often depends on the perceived returns, leave
room for flexibility. Objectives can be changed and
the analysis modified. This is a major advantage
of sound planning. The project can be changed
much easier and cheaper on paper than on the
ground.


FIGURE 1. FLOWCHART OF MAJOR FINANCIAL
ANALYSIS STEPS.

Determine Attach Discount
Identify Schedule Dollar 11 Values
Objectives of Activities Values to to the
Activities Present

FIGURE 2. SAMPLE TIME LINE.


2. Determine the Schedule of Activities
In the second step the schedule of activities is
determined. Contact someone familiar with the
product who can assist you in this step. The events
should be placed in the appropriate spots on a
time line. The time line is a convenient way to
track these activities over time. A sample time line
for a Christmas tree farm is shown in Figure 2. In
this case, planting, pruning, mowing, fertilizing,
and marketing are needed. Make sure you include
any and all activities, including your own, that the
project will require. A full rotation or production
cycle should be studied including costs of prepara-
tion and postharvest cleanup. Identify as closely
as possible the time of year (or period) that the
activity takes place. Activities that occur at the
beginning of the year (or period) rather than the
end may have a significant effect on the outcome
of your analysis.
3. Attach Dollar Values to Activities
The third step is to attach dollar values to the
schedule of activities. Determining the timing and
amounts of cash flows can be difficult. If you are
going to be personally involved in the management
of your land it is important to include your time
as a cost. There are two ways to incorporate your









STEPS IN FINANCIAL ANALYSIS
Sound financial analysis depends on a complete
accounting of costs and benefits over time. Keeping
track of the costs and revenues and when they occur
is important for management of cash flow. The timing
and amounts of these cash flows determine the pro-
fitability of the forest resource enterprise.
The flowchart in Figure 1 illustrates the steps taken
in the financial analysis.
1. Identify the Objectives
In the first step the owner's objective and level of
involvement are determined. This step may seem
straightforward. However, this is not always the
case. It is at this stage that you must ask yourself
how involved you want to be in the enterprise. Will
the project be a hobby or do you wish to make it
your major line of work? How much time do you
want to devote to the project? How much are you
willing to invest? Because the amount of involve-
ment often depends on the perceived returns, leave
room for flexibility. Objectives can be changed and
the analysis modified. This is a major advantage
of sound planning. The project can be changed
much easier and cheaper on paper than on the
ground.


FIGURE 1. FLOWCHART OF MAJOR FINANCIAL
ANALYSIS STEPS.

Determine Attach Discount
Identify Schedule Dollar 11 Values
Objectives of Activities Values to to the
Activities Present

FIGURE 2. SAMPLE TIME LINE.


2. Determine the Schedule of Activities
In the second step the schedule of activities is
determined. Contact someone familiar with the
product who can assist you in this step. The events
should be placed in the appropriate spots on a
time line. The time line is a convenient way to
track these activities over time. A sample time line
for a Christmas tree farm is shown in Figure 2. In
this case, planting, pruning, mowing, fertilizing,
and marketing are needed. Make sure you include
any and all activities, including your own, that the
project will require. A full rotation or production
cycle should be studied including costs of prepara-
tion and postharvest cleanup. Identify as closely
as possible the time of year (or period) that the
activity takes place. Activities that occur at the
beginning of the year (or period) rather than the
end may have a significant effect on the outcome
of your analysis.
3. Attach Dollar Values to Activities
The third step is to attach dollar values to the
schedule of activities. Determining the timing and
amounts of cash flows can be difficult. If you are
going to be personally involved in the management
of your land it is important to include your time
as a cost. There are two ways to incorporate your









STEPS IN FINANCIAL ANALYSIS
Sound financial analysis depends on a complete
accounting of costs and benefits over time. Keeping
track of the costs and revenues and when they occur
is important for management of cash flow. The timing
and amounts of these cash flows determine the pro-
fitability of the forest resource enterprise.
The flowchart in Figure 1 illustrates the steps taken
in the financial analysis.
1. Identify the Objectives
In the first step the owner's objective and level of
involvement are determined. This step may seem
straightforward. However, this is not always the
case. It is at this stage that you must ask yourself
how involved you want to be in the enterprise. Will
the project be a hobby or do you wish to make it
your major line of work? How much time do you
want to devote to the project? How much are you
willing to invest? Because the amount of involve-
ment often depends on the perceived returns, leave
room for flexibility. Objectives can be changed and
the analysis modified. This is a major advantage
of sound planning. The project can be changed
much easier and cheaper on paper than on the
ground.


FIGURE 1. FLOWCHART OF MAJOR FINANCIAL
ANALYSIS STEPS.

Determine Attach Discount
Identify Schedule Dollar 11 Values
Objectives of Activities Values to to the
Activities Present

FIGURE 2. SAMPLE TIME LINE.


2. Determine the Schedule of Activities
In the second step the schedule of activities is
determined. Contact someone familiar with the
product who can assist you in this step. The events
should be placed in the appropriate spots on a
time line. The time line is a convenient way to
track these activities over time. A sample time line
for a Christmas tree farm is shown in Figure 2. In
this case, planting, pruning, mowing, fertilizing,
and marketing are needed. Make sure you include
any and all activities, including your own, that the
project will require. A full rotation or production
cycle should be studied including costs of prepara-
tion and postharvest cleanup. Identify as closely
as possible the time of year (or period) that the
activity takes place. Activities that occur at the
beginning of the year (or period) rather than the
end may have a significant effect on the outcome
of your analysis.
3. Attach Dollar Values to Activities
The third step is to attach dollar values to the
schedule of activities. Determining the timing and
amounts of cash flows can be difficult. If you are
going to be personally involved in the management
of your land it is important to include your time
as a cost. There are two ways to incorporate your









STEPS IN FINANCIAL ANALYSIS
Sound financial analysis depends on a complete
accounting of costs and benefits over time. Keeping
track of the costs and revenues and when they occur
is important for management of cash flow. The timing
and amounts of these cash flows determine the pro-
fitability of the forest resource enterprise.
The flowchart in Figure 1 illustrates the steps taken
in the financial analysis.
1. Identify the Objectives
In the first step the owner's objective and level of
involvement are determined. This step may seem
straightforward. However, this is not always the
case. It is at this stage that you must ask yourself
how involved you want to be in the enterprise. Will
the project be a hobby or do you wish to make it
your major line of work? How much time do you
want to devote to the project? How much are you
willing to invest? Because the amount of involve-
ment often depends on the perceived returns, leave
room for flexibility. Objectives can be changed and
the analysis modified. This is a major advantage
of sound planning. The project can be changed
much easier and cheaper on paper than on the
ground.


FIGURE 1. FLOWCHART OF MAJOR FINANCIAL
ANALYSIS STEPS.

Determine Attach Discount
Identify Schedule Dollar 11 Values
Objectives of Activities Values to to the
Activities Present

FIGURE 2. SAMPLE TIME LINE.


2. Determine the Schedule of Activities
In the second step the schedule of activities is
determined. Contact someone familiar with the
product who can assist you in this step. The events
should be placed in the appropriate spots on a
time line. The time line is a convenient way to
track these activities over time. A sample time line
for a Christmas tree farm is shown in Figure 2. In
this case, planting, pruning, mowing, fertilizing,
and marketing are needed. Make sure you include
any and all activities, including your own, that the
project will require. A full rotation or production
cycle should be studied including costs of prepara-
tion and postharvest cleanup. Identify as closely
as possible the time of year (or period) that the
activity takes place. Activities that occur at the
beginning of the year (or period) rather than the
end may have a significant effect on the outcome
of your analysis.
3. Attach Dollar Values to Activities
The third step is to attach dollar values to the
schedule of activities. Determining the timing and
amounts of cash flows can be difficult. If you are
going to be personally involved in the management
of your land it is important to include your time
as a cost. There are two ways to incorporate your









time into the financial analysis. The first, and most
straightforward, is to enter a wage for your time
into the cost calculations. This wage should reflect
the value of your time. For example, if you were
considering quitting a job to work on your land,
the value of your time is your current wage. If, on
the other hand, you consider working on your land
as recreation or therapy, you might charge yourself
a lower or even zero wage.
The second alternative to evaluating your time is
to estimate your hours invested but not to include
your wages as a cost. The financial return calcu-
lated in this way will include both profits and
wages. This figure and the number of hours in-
vested can be used to determine whether your time
is worth the returns.
Predicting other costs and revenues throughout
the analysis period will probably require profes-
sional assistance or at least contact with persons
currently in the business. Dollar figures will de-
pend on the present and future supplies and de-
mands of the product and any input needs. The
economic environment is constantly changing. It
is therefore very important to have the best and
most current information available. For example,
if the economics of Christmas trees appeared very
favorable 5 years ago, then many people may have
planted trees at that time and the increased com-
petition and supply may keep future prices too low
to justify current investment. So even if demand
for Christmas trees did not change in the last 5
years, the changes in supply may affect your invest-
ment decision.
Some products have grower associations such as
the Florida Christmas Tree Association or the
Shiitake Mushroom Association. These associa-
tions may be of some assistance in determining
present and future costs and revenues. Some pro-
ducts however do not yet have well defined markets
and prices. In these cases, county extension agents
and foresters as well as consultants may be of some
assistance.
4. Discount Values to the Present
Because the costs and revenues are spread out
over the length of the planning period we must
take into account that future dollars are not worth
as much as today's dollar. In financial terms it is
easy to see that this is true since you could put
less than a dollar in the bank today to get a dollar
in the future. How long you would have to wait
depends on how much money you started with, the
interest rate, and the frequency of compounding
at your bank. The key factor in analyzing the time


value of money is the discount rate or alternative
rate of return. This is the cost of borrowing money
or the rate of return available in other investments.
These other investments may be alternative land
uses or simply the rate of return available in a
savings account or money market fund.
Suppose you were given the choice of receiving
$100 today or receiving $1,000 in 20 years. We can
use financial analysis and the discount rate to
compare these two "costless" investments. The ob-
jective is to determine the present value of these
investments. For the first investment this is easy:
the present value of receiving $100 today is $100.
Determining the present value of receiving $1,000
in 20 years, however, is a little more complicated.
If we consider our alternative rate of return to be
the rate that we earn on our savings account, then
we want to determine how much money would we
have to put in our savings account today, to be able
to withdraw $1,000 in 20 years. If this "present
value" is greater than $100 then it is the preferable
investment. The present value is calculated as:


(Equation 1)


PV= FV
(1+i)n


where n is the number of years, i is the alternative
rate of return (expressed in decimal form), and FV
is the future value. If your savings account pays
7 percent interest, then n= 20, i=.07 (for 7 per-
cent), and FV=$1,000. The calculated PV is
$258.42 which implies that receiving $1,000 in 20
years is a better investment since $258.42 is grea-
ter than $100. You can verify the accuracy of the
formula by noting that one year after depositing
$258.42 in your account you would have $258.42
+ (.07 $258.42) or $258.42 (1.07) which is equal
to $276.51 (where the denotes "multiplied by").
After two years you would have $276.51 (1.07)
and so on until year 20 in which you would have,
except for a rounding error, $1,000.
Unfortunately, most investments involve costs. To
examine investments with costs you compare their
net present values (NPV), which is simply the pre-
sent value of returns less the present value of costs.
Assume that there are now two investments and
both require you to invest $60 today and $50 at
the end of 5 years. Investment A returns $150 in
5 years while investment B returns $250 in 7 years.
Are these investments profitable and, if so, which
is better? The time line for these two investments
is shown in Figure 3.








FIGURE 3. TIME LINES OF TWO HYPOTHETICAL
INVESTMENTS.


$35.65
$60.00
PV of costs = $95.65


PV (@ 7 percent for 5 years)


I I I
year 0 1 2


3 4 5 6 7 8
3 4 5 6 7 8


Investment A:


PV of returns = $106.95


Net Return Investment A =
Total Returns Total
Investment RB

PV of returns = $155.69 -....


PV (@ 7 percent for 5 years)




year 0 1 2 3 4 5 6 7 8


Costs = $106.95 $95.65 = $11.30


PV (@ 7 percent for 7 years)


year 0 1 2 3 4 5 6 7 8


Net Return Investment B =
Total Returns Total


Costs = $155.69 $95.65 = $60.04


Assume a discount rate of 7 percent. Using Equa-
tion 1 as the PV for investment A, the PV of returns
is $106.95 (FV= $150, n= 5, i =.07). The PV of the
costs is equal to the $60 paid today plus the PV
of the $50 in 5 years. Discounting the $50 for 5
years (using Equation 1) gives $35.65. The total
present value of costs, therefore, is $60 + $35.35
or $95.65. The net present value of investment A
is therefore $106.95 $95.65 or $11.30.
Because these investments have the same costs,
only the revenues need to be calculated for Invest-
ment B. In this case, the FV=$250, n=7, and
i =.07. The PV of investment B therefore is equal
to $155.69 (using Equation 1). The NPV of invest-
ment B is therefore $155.69 $95.65 or $60.04. So
investment B is preferred. This $60.04 represents
the current value of the investment over and above
an investment that yields the alternative rate of
return (7 percent in this case). Any investment
with a positive NPV will return more than the
alternative rate of return used in its calculations.
In other words, the decision to invest in A will
return $11.30 more than simply putting $60 in the
bank today and $50 in the bank in 5 years. Simi-
larly, in investment B the return (NPV) of $60.04
is that much better than putting the money in a
savings account.


For simplicity, the above examples have not in-
cluded inflation or changes in the purchasing
power of the dollar. There are two ways to incorpo-
rate inflation into your analysis. The analysis can
be done in real (constant) dollars or current (in-
flated or nominal) dollars. Real dollar analyses
net out the effect of inflation from all costs, re-
venues, and interest rates. Current dollar analyses
include the effects of inflation. For these reasons,
it is important to determine if your cost and re-
venue forecasts include inflation. Your discount
rate may also need to be adjusted depending on
what type of analysis you undertake.
Sometimes it is desirable to calculate an invest-
ment's internal "rate of return" (IRR). This is sim-
ply the discount rate that makes the NPV equal
to zero. For investment A the IRR is 10.8 percent
and for investment B, the IRR is 17.1 percent. Un-
fortunately, there is no shortcut formula for cal-
culating this rate of return. To calculate the IRR
by hand requires changing the discount rate in
the NPV calculations by trial and error until you
find the discount rate that makes the NPV zero.
Most financial calculators can calculate it easily.
Calculation of a unique IRR for an investment is
not always possible, and rankings of investments


/ I I









by IRR are not always the same as rankings by
NPV. It is generally preferable to rank investments
by NPV. For an in-depth discussion of differences
in IRR and NPV criteria see Brigham (1985) or
any finance textbook.
Before detailed examples are used, one other con-
cept of the time value of money should be intro-
duced. Often an investor would like to compare
forestry investments to annual crops or leasing
land on a yearly contract. Once the NPV is calcu-
lated it is easy to convert to an annual basis. This
is especially important to those who are comparing
two projects whose production lengths are differ-
ent. Christmas trees and Shiitake Mushrooms are
examples. While it takes 4 or 5 years to grow a
Christmas tree here in Florida, mushroom produc-
tion may only take one year. Comparing the annual
returns expected between the two makes it easy
to decide which is more profitable. The calculated
amount is defined as the yearly payment that
would pay off the NPV of the project. To calculate
the yearly, or annual equivalent (AE), the present
value should first be calculated for the analysis
period. Then, using the traditional formula used
by many financial analysts to calculate payments,
an annual equivalent can be found:
AE = NPV[i(1+i)n] (Equation 2)
[(l+i)n-1]
where AE = Annual Equivalent and the other
symbols are the same as before. The AE is very
useful in comparing investments of different pro-
ject lengths as long as reinvestment assumptions
are made.
In the next section, the steps in a financial analysis
will be presented for a number of alternative forest-
land uses. An example of an enterprise with yearly
returns will be followed by an example of less fre-
quent returns. Finally, a mixture of the two types
of investments will be presented in a Christmas
tree farm case.

EXAMPLES
The following examples are designed to give the
landowner an idea of the steps involved in financially
analyzing a forestry enterprise. It should be em-
phasized that financial analysis of these forestry in-
vestments is basically no different than most busi-
ness analyses. The procedures outlined in each exam-
ple, along with estimates of cash flows, provide valu-
able information. In the examples, the land is as-
sumed to be owned by the individual doing the
analysis. If this is not the case, the land rent or
purchase price must be included in the analysis.


Example 1: Hunting Leases
The situation: Wayne Baker owns 300 acres of
natural pine and hardwood. A local hunting club
is interested in leasing the land for hunting for 10
years. Wayne knows two neighbors who have leases
with the club. The first neighbor leases a similar
parcel of land for $4.00 per acre. The second
neighbor has made some improvements that cost
him $3,000 up front. He also has maintenance
costs of $500 per year. This neighbor is able to
lease the tract for $7.50 per acre. Wayne would
like to decide which hunting arrangement, if any,
to pursue.
To evaluate the profitability of the investment,
Wayne must determine his discount rate. As dis-
cussed earlier, it is often determined by the next
best alternative he may have. In this case Wayne
could put his money in a Certificate of Deposit
(CD) at the local bank for 8.0%. Therefore, at this
rate, if the NPV/earning of his investment is posi-
tive, he will be earning more than he would with
the CD. If the NPV is negative, the CD will return
more. To analyze the two hunting lease arrange-
ments each should be analyzed independently and
the one with the highest positive NPV chosen. The
projects can be identified as a low intensity (do









by IRR are not always the same as rankings by
NPV. It is generally preferable to rank investments
by NPV. For an in-depth discussion of differences
in IRR and NPV criteria see Brigham (1985) or
any finance textbook.
Before detailed examples are used, one other con-
cept of the time value of money should be intro-
duced. Often an investor would like to compare
forestry investments to annual crops or leasing
land on a yearly contract. Once the NPV is calcu-
lated it is easy to convert to an annual basis. This
is especially important to those who are comparing
two projects whose production lengths are differ-
ent. Christmas trees and Shiitake Mushrooms are
examples. While it takes 4 or 5 years to grow a
Christmas tree here in Florida, mushroom produc-
tion may only take one year. Comparing the annual
returns expected between the two makes it easy
to decide which is more profitable. The calculated
amount is defined as the yearly payment that
would pay off the NPV of the project. To calculate
the yearly, or annual equivalent (AE), the present
value should first be calculated for the analysis
period. Then, using the traditional formula used
by many financial analysts to calculate payments,
an annual equivalent can be found:
AE = NPV[i(1+i)n] (Equation 2)
[(l+i)n-1]
where AE = Annual Equivalent and the other
symbols are the same as before. The AE is very
useful in comparing investments of different pro-
ject lengths as long as reinvestment assumptions
are made.
In the next section, the steps in a financial analysis
will be presented for a number of alternative forest-
land uses. An example of an enterprise with yearly
returns will be followed by an example of less fre-
quent returns. Finally, a mixture of the two types
of investments will be presented in a Christmas
tree farm case.

EXAMPLES
The following examples are designed to give the
landowner an idea of the steps involved in financially
analyzing a forestry enterprise. It should be em-
phasized that financial analysis of these forestry in-
vestments is basically no different than most busi-
ness analyses. The procedures outlined in each exam-
ple, along with estimates of cash flows, provide valu-
able information. In the examples, the land is as-
sumed to be owned by the individual doing the
analysis. If this is not the case, the land rent or
purchase price must be included in the analysis.


Example 1: Hunting Leases
The situation: Wayne Baker owns 300 acres of
natural pine and hardwood. A local hunting club
is interested in leasing the land for hunting for 10
years. Wayne knows two neighbors who have leases
with the club. The first neighbor leases a similar
parcel of land for $4.00 per acre. The second
neighbor has made some improvements that cost
him $3,000 up front. He also has maintenance
costs of $500 per year. This neighbor is able to
lease the tract for $7.50 per acre. Wayne would
like to decide which hunting arrangement, if any,
to pursue.
To evaluate the profitability of the investment,
Wayne must determine his discount rate. As dis-
cussed earlier, it is often determined by the next
best alternative he may have. In this case Wayne
could put his money in a Certificate of Deposit
(CD) at the local bank for 8.0%. Therefore, at this
rate, if the NPV/earning of his investment is posi-
tive, he will be earning more than he would with
the CD. If the NPV is negative, the CD will return
more. To analyze the two hunting lease arrange-
ments each should be analyzed independently and
the one with the highest positive NPV chosen. The
projects can be identified as a low intensity (do









nothing) lease and high intensity lease (improve-
ments and maintenance). The low intensity lease
follows:
1. Low intensity hunting lease:
To begin the analysis, follow the steps as out-
lined in the early section.
Step 1 Identification of the objective. The
landowner wishes to increase his annual in-
come. In this case, a ten-year hunting lease
is to be arranged in which the landowner has
very little or no active participation.
Step 2 Identification of activities. With
the low intensity arrangement, the only ac-
tivities are the execution of the lease and the
yearly collection of hunting fees (Figure 4a).
Step 3 Attach dollar values to the ac-
tivities. Assuming no cost of lease execution
or fee collection to Wayne, the yearly expected
income is equal to the per-acre revenue times
the total acres in the tract, or $4.00/acre *
300 acres for $1,200 (Figure 4b).
Step 4 Discount the cash flows to the pre-
sent. To calculate the NPV of a yearly return,
the present value of each payment needs to
be determined. Although this is simply cal-


culating 10 present values (one for each lease
payment received) and adding them together,
it can become quite time consuming. Imagine
a 50-year lease! A formula will be introduced
to make calculations easier. This formula is
used when costs or revenues are incurred at
a regular rate throughout the project length.
This formula saves the repetitious computa-
tions involved in yearly discounting.
The formula is simply a derivation of the pre-
sent value formula (Equation 1):
PV = a[(l+i)"-1] (Equation 3)
i(l+i)n
where a is the yearly cost or revenue and the
others are as before.
With low intensity hunting:
PV = $1,200[(1+.08)10-1] = $8,052.10
.08(1+.08)10
Because there are no costs involved, the NPV
will be positive and equal to the PV. In this
case it is $8,052.10. This is the present value
of $1,200 per year for 10 years at an 8 percent
discount rate. This NPV can now be compared
to the more intensive hunting operation of
Wayne's other neighbor.


FIGURE 4A. LOW INTENSITY HUNTING: SCHEDULE OF
ACTIVITIES.





0Yer: .3 .4 0 6 8 9 1 0 c





Year: 0 1 2 3 4 5 6 7 8 9 10
FIGURE 48. Low INTENSITY HUNTING: DOLLAR
VALUES.







Year: 0 1 2 3 4 5 6 7 8 9 10









2. High intensity hunting lease:
Step 1 Identification of the project and
objectives. The project now involves putting
in wildlife food plots, fencing, and shelters.
It involves some start-up cost (and time) as
well as intermediate management activities.
The lease is 10 years. Objectives are to obtain
additional income with some involvement in
the operation.
Step 2 Identification of activities. With
the high intensity arrangement, Wayne, with
the help of his neighbor, has identified the
following activities and their timings (Figure
5a).
Step 3 Attach dollar values to the ac-
tivities. Wayne's neighbor paid a start-up
cost of $3,000 and $500 per year for the hunt-
ing operation. He believes these figures are
close to average for the type of hunting lease
arrangement and will probably remain the
sarie for the next few years. The revenues
are equal to $7.50/acre 300 acres or $2,250
per year. These along with the costs are sum-
marized in Figure 5b.

FIGURE 5A. HIGH INTENSITY HUNTING: SCHEDULE OF
ACTIVITIES.


Step 4 Discount the cash flows to the pre-
sent. The present net value is calculated in
a manner similar to that of the low intensity
lease:
PV = $2250[(1+.08)10-1] = $15,097.68
.08(1+.08)10
Yearly management costs are calculated simi-
larly:
PV = $500[(1+.08)10-1] = $3,355.04
.08(1+.08)10
Add $3,355.04 to the original $3,000 start-up
cost to obtain a total cost of $6,355.04. Using
Equation 3, the NPV of the high intensity
project, therefore, is the net present revenues
minus the net present costs = $15,097.68
minus $6,355.04 or $8,742.64.
The two projects can now be compared to de-
termine which project has a higher financial
return. The low intensity lease agreement
has a net present value of $8,052.10 while
the high intensity lease agreement has a
NPV of $8,742.64. If all costs (including
Wayne's time and effort) and revenues have


S Year: 0 1 2 3 4 5 6 8 9 10
FIGURE 5B. HIGH INTENSITY HUNTING: DOLLAR
VALUES.
Costs





Year: 0 1 2 3 4 5 6 7 8 9 10

Revenues





Year: 0 1 2 3 4 5 6 7 8 9 10









been taken into account, the high intensity
project returns $690.54 more than the low
intensity project. Now Wayne can bring in
any other nondollar variables to assist him
in deciding which (if any) level of intensity
he will choose.

Example 2: Pine Straw Production
An enterprise may produce periodic revenues in-
stead of annual revenues. Pulpwood production,
for example, can provide a return every 20 to 25
years if trees are replanted after each harvest. An
alternative enterprise compatible with timber pro-
duction that has received attention lately is the
production of pine straw. The following example
shows the steps involved in calculating the NPV
of periodic returns for a 5-year raking cycle as-
sociated with pine straw production.
The situation: Mary Smith is contemplating the
possibility of harvesting pine straw on her 20-acre
site of 5-year-old slash pine. She has heard that
plantations 10 years and older with no vegetation
in the understory can provide a profit of $30 per
acre if raked and baled every 5 years. She has been
advised however that her stand has too many
shrubs and hardwoods and it will cost her $1,000
to clear away unwanted vegetation. She would like
to know if the $1,000 investment needed to clean
the stand will be profitable or not. She has a dis-
count rate of 7%.


Step 1 Identification of the project and ob-
jective. The project is pine straw production
with an initial cost, and delayed periodic re-
venues. The landowner would like to obtain ad-
ditional income to pay property and other taxes.
Participation in the enterprise is low.
Step 2 Identification of activities. Convert-
ing the stand to a rakeable one may include
herbicide application, burning, and mowing.
When the plantation reaches 10. years of age,
Mary will need to collect the pine straw fee (Fi-
gure 6a).
Step 3 Attach dollar values to the activities.
Assuming no cost of collection to Mary, the
periodic expected income in years 10, 15, and
20 is equal to the per acre revenue times the
total acres in the tract, or $30.00/acre 20 acres
for $600 (Figure 6b).
Step 4 Discount the cash flows to the pre-
sent. A periodic formula, similar to the annual
formula (Equation 3), can be used to discount
the periodic cash flows to the present so Mary
can determine whether the $1,000 investment
will return at least 7 percent:
PV = a[(1+i)n-1] (Equation 4)
[(l+i)t-1](l+i)n
where n is the number of years (or interest bear-
ing periods) in the analysis and t is the interval
in years between the periodic payments. In this
example, n is 15 (age 5 to 20) and t equals 5
(payments are received every 5 years).
PV = $600[(1+.07)15-1]
[(1+.07)5-1](1+.07)15
= $950.27
Subtracting the cost of $1,000 from the present
value leaves -$49.73 or a negative net present
value. In this case, the revenues to be received


~yB~r-~//
71









in the future do not justify the $1,000 invest-
ment (at a 7 percent discount rate). In this case
Mary should look into delaying the investment
until year 9 (a year before the first harvest). An
analysis of this could be done rather easily using
expected costs and revenues.
Example 3: Christmas Trees
An example of an enterprise where the economic
analysis involves a period of time before annual
income is received is the case of Christmas tree
growing. In this example, an investment of be-
tween 4 and 10 years is necessary before trees can
be harvested. Then, if managed properly, the trees
can be grown and cut in such a manner that yearly
production can become stable.
The situation: Roger Jones owns a small farm in
northeast Florida. He has become interested in
native-grown Christmas trees. He would like to


know if it can be profitable to grow trees on an
acre of cropland adjacent to his pines. The acre


FIGURE 6A. PINE STRAW PRODUCTION: SCHEDULE OF
ACTIVITIES.




0 0)

02



Year: 0 5 10 15 20



FIGURE 6B. PINE STRAW PRODUCTION: DOLLAR
VALUES.










Year: 0 5 10 15 20









has traditionally given him a return of 8.35% on
his investment. He has the option of maintaining
his current crop or investing in Christmas trees.
The traditional rate therefore is his discount rate.
Step 1 Identification of the project and ob-
jectives. Roger is interested in planting an acre
in Christmas trees. He is only interested in one
full rotation (selling in years 4 through 7). If a
financial analysis looks promising, he may de-
cide to bring the trees into continual production
on more acres.
Step 2 Identification of activities. With the
help of an extension specialist and the local
growers' association, Roger has identified a list
of activities (Table 1 and Figure 7a).








FIGURE 7A. CHRISTMAS TREE PRODUCTION:
SCHEDULE OF ACTIVITIES.


Table 1. Schedule of activities and dollar values for a
hypothetical Christmas tree farm.

Planting (no site preparation needed) $ 200 (Cost)
Pruning (yearly, starting at end of
year 3) $ 200 (Cost)
Other yearly operating costs
(beginning at the end of year 1) $ 300 (Cost)
Estimated harvest value per year
for 4 years
(150 trees/acre x $10 per tree) $1500 (Revenue)

Step 3 Attach dollar values to the activities.
The growers' association was also able to provide
Roger with average costs and returns for Christ-
mas tree growing in northeast Florida (Table 1,
Figure 7b).


'C,
0if
c-'


0) 0)


0)

C,,C-


Schedule of
Activities


Year:


FIGURE 7B. CHRISTMAS TREE PRODUCTION: DOLLAR
VALUES.
0 1 2 3 4 5 6 7


Costs




Year:


Returns




Year:


0 1 2 3 4 5 6 7


0 1 2 3 4 5 6 7


cD~
cj









Step 4 Discount the cash flows to the pre-
sent. The present value is calculated using first
the formula for annual payments (Equation 2),
and then the formula for present value (Equa-
tion 1). This is necessary because the annual:
revenues begin in year four and must be dis-
counted to the present.
First, calculate the present value of expected
revenues. Revenues of $1,500 per acre per year
are expected in years 4 through 7. As discussed
above, the revenues are not every year from the
beginning so we must first calculate the PV of
the four years of revenues as of year 4 and then
discount this sum back to the present:
(from Equation 4)
PV4 = $1,500[(1+0.0835)4-1]
0.0835(1+0.0835)4
= $4,929.73
The "PV4" is the present value at year 4 of the
investment. To continue with the analysis, we
must bring the PV at year 4 to the present value
at year 0, where the analysis is being conducted
from. This is done using the simple discounting
formula (Equation 1):
PVo = $4,929.73
(1+0.0835)4
= $3,576.91
Costs are calculated in a similar manner:
Cost of pruning for 5 years
PV3 = $200[(1+0.0835)5-1]
0.0835(1+0.0835)5
= $791.23
n=5 in this case because pruning starts at the
end of year three and continues through the
final harvest at the end of year 7.
Calculating the PVo = $791.23
(1+0.0835)3
= $622.03
Other operating costs for the seven years of op-
eration:
PV0 = $300[(1+0.0835)7-1]
0.0835(1+0.0835)7
= $1,543.39
Total costs = Planting costs + pruning costs +
other operating costs
= $200.00 + $622.02 + $1543.39
= $2,365.41


Net PresentValue = PV(revenues)- PV(Costs)
= $3,576.91 $2,165.41
= $1,211.50 per acre
To calculate the annual equivalent ofthis invest-
ment we substitute the variables into the AE
equation:
AE = $1,211.50[0.0835(1.0835)8]
[(1.0835)8-1]
= $213.63 per acre per year.
Investing in this project returns the equivalent
of close to $214 per acre per year. This figure
can now be compared to more readily available
annual production figures like corn or tomatoes,
or leasing the land.

ISSUES IN THE ANALYSIS OF YOUR
ENTERPRISE
Risk and the Financial Analysis
Many factors influence the financial success of in-
vesting in an alternative enterprise. The one that
most likely has the greatest influence is uncer-
tainty of future prices. As mentioned earlier, price
is determined by supply and demand. A change in
one or the other will change the average market
price and the profitability of the product. Often,
when potential investments are investigated, a
range of prices is studied to determine a "break-
even" price. This is the lowest price your product
could bring and still earn the return you require.
For example, in the Christmas tree example above,
trees are sold for $10 each. Assuming Roger sells
150 trees as before, he could sell them for as little
as $6.05 each and still make his required rate of
return. He could also sell as little as 90 trees per
year at the $10 rate. This is known as sensitivity
analysis and it can be helpful in finding your pro-
duction and price targets. It is also helpful in set-
ting goals for your alternative enterprise.

Including Taxes in the Financial Analysis
The tax reform act of 1986 shows the importance
of updating financial analyses. Landowners per-
forming analyses under the old laws must now
reevaluate their situations. To quantify how in-
come taxes will affect the NPV it is necessary to
make assumptions about the tax rate for your in-
come. Since income from most of these operations
is presently taxed at the ordinary rate, revenues
should be reduced in the year they occur before
discounting. Although the new laws have made
income tax calculations easier, they have compli-









Step 4 Discount the cash flows to the pre-
sent. The present value is calculated using first
the formula for annual payments (Equation 2),
and then the formula for present value (Equa-
tion 1). This is necessary because the annual:
revenues begin in year four and must be dis-
counted to the present.
First, calculate the present value of expected
revenues. Revenues of $1,500 per acre per year
are expected in years 4 through 7. As discussed
above, the revenues are not every year from the
beginning so we must first calculate the PV of
the four years of revenues as of year 4 and then
discount this sum back to the present:
(from Equation 4)
PV4 = $1,500[(1+0.0835)4-1]
0.0835(1+0.0835)4
= $4,929.73
The "PV4" is the present value at year 4 of the
investment. To continue with the analysis, we
must bring the PV at year 4 to the present value
at year 0, where the analysis is being conducted
from. This is done using the simple discounting
formula (Equation 1):
PVo = $4,929.73
(1+0.0835)4
= $3,576.91
Costs are calculated in a similar manner:
Cost of pruning for 5 years
PV3 = $200[(1+0.0835)5-1]
0.0835(1+0.0835)5
= $791.23
n=5 in this case because pruning starts at the
end of year three and continues through the
final harvest at the end of year 7.
Calculating the PVo = $791.23
(1+0.0835)3
= $622.03
Other operating costs for the seven years of op-
eration:
PV0 = $300[(1+0.0835)7-1]
0.0835(1+0.0835)7
= $1,543.39
Total costs = Planting costs + pruning costs +
other operating costs
= $200.00 + $622.02 + $1543.39
= $2,365.41


Net PresentValue = PV(revenues)- PV(Costs)
= $3,576.91 $2,165.41
= $1,211.50 per acre
To calculate the annual equivalent ofthis invest-
ment we substitute the variables into the AE
equation:
AE = $1,211.50[0.0835(1.0835)8]
[(1.0835)8-1]
= $213.63 per acre per year.
Investing in this project returns the equivalent
of close to $214 per acre per year. This figure
can now be compared to more readily available
annual production figures like corn or tomatoes,
or leasing the land.

ISSUES IN THE ANALYSIS OF YOUR
ENTERPRISE
Risk and the Financial Analysis
Many factors influence the financial success of in-
vesting in an alternative enterprise. The one that
most likely has the greatest influence is uncer-
tainty of future prices. As mentioned earlier, price
is determined by supply and demand. A change in
one or the other will change the average market
price and the profitability of the product. Often,
when potential investments are investigated, a
range of prices is studied to determine a "break-
even" price. This is the lowest price your product
could bring and still earn the return you require.
For example, in the Christmas tree example above,
trees are sold for $10 each. Assuming Roger sells
150 trees as before, he could sell them for as little
as $6.05 each and still make his required rate of
return. He could also sell as little as 90 trees per
year at the $10 rate. This is known as sensitivity
analysis and it can be helpful in finding your pro-
duction and price targets. It is also helpful in set-
ting goals for your alternative enterprise.

Including Taxes in the Financial Analysis
The tax reform act of 1986 shows the importance
of updating financial analyses. Landowners per-
forming analyses under the old laws must now
reevaluate their situations. To quantify how in-
come taxes will affect the NPV it is necessary to
make assumptions about the tax rate for your in-
come. Since income from most of these operations
is presently taxed at the ordinary rate, revenues
should be reduced in the year they occur before
discounting. Although the new laws have made
income tax calculations easier, they have compli-









Step 4 Discount the cash flows to the pre-
sent. The present value is calculated using first
the formula for annual payments (Equation 2),
and then the formula for present value (Equa-
tion 1). This is necessary because the annual:
revenues begin in year four and must be dis-
counted to the present.
First, calculate the present value of expected
revenues. Revenues of $1,500 per acre per year
are expected in years 4 through 7. As discussed
above, the revenues are not every year from the
beginning so we must first calculate the PV of
the four years of revenues as of year 4 and then
discount this sum back to the present:
(from Equation 4)
PV4 = $1,500[(1+0.0835)4-1]
0.0835(1+0.0835)4
= $4,929.73
The "PV4" is the present value at year 4 of the
investment. To continue with the analysis, we
must bring the PV at year 4 to the present value
at year 0, where the analysis is being conducted
from. This is done using the simple discounting
formula (Equation 1):
PVo = $4,929.73
(1+0.0835)4
= $3,576.91
Costs are calculated in a similar manner:
Cost of pruning for 5 years
PV3 = $200[(1+0.0835)5-1]
0.0835(1+0.0835)5
= $791.23
n=5 in this case because pruning starts at the
end of year three and continues through the
final harvest at the end of year 7.
Calculating the PVo = $791.23
(1+0.0835)3
= $622.03
Other operating costs for the seven years of op-
eration:
PV0 = $300[(1+0.0835)7-1]
0.0835(1+0.0835)7
= $1,543.39
Total costs = Planting costs + pruning costs +
other operating costs
= $200.00 + $622.02 + $1543.39
= $2,365.41


Net PresentValue = PV(revenues)- PV(Costs)
= $3,576.91 $2,165.41
= $1,211.50 per acre
To calculate the annual equivalent ofthis invest-
ment we substitute the variables into the AE
equation:
AE = $1,211.50[0.0835(1.0835)8]
[(1.0835)8-1]
= $213.63 per acre per year.
Investing in this project returns the equivalent
of close to $214 per acre per year. This figure
can now be compared to more readily available
annual production figures like corn or tomatoes,
or leasing the land.

ISSUES IN THE ANALYSIS OF YOUR
ENTERPRISE
Risk and the Financial Analysis
Many factors influence the financial success of in-
vesting in an alternative enterprise. The one that
most likely has the greatest influence is uncer-
tainty of future prices. As mentioned earlier, price
is determined by supply and demand. A change in
one or the other will change the average market
price and the profitability of the product. Often,
when potential investments are investigated, a
range of prices is studied to determine a "break-
even" price. This is the lowest price your product
could bring and still earn the return you require.
For example, in the Christmas tree example above,
trees are sold for $10 each. Assuming Roger sells
150 trees as before, he could sell them for as little
as $6.05 each and still make his required rate of
return. He could also sell as little as 90 trees per
year at the $10 rate. This is known as sensitivity
analysis and it can be helpful in finding your pro-
duction and price targets. It is also helpful in set-
ting goals for your alternative enterprise.

Including Taxes in the Financial Analysis
The tax reform act of 1986 shows the importance
of updating financial analyses. Landowners per-
forming analyses under the old laws must now
reevaluate their situations. To quantify how in-
come taxes will affect the NPV it is necessary to
make assumptions about the tax rate for your in-
come. Since income from most of these operations
is presently taxed at the ordinary rate, revenues
should be reduced in the year they occur before
discounting. Although the new laws have made
income tax calculations easier, they have compli-









cated the deduction of expenses related to the man-
agement of the business. The kinds and amounts
now depend on the extent to which you participate
in the project.
Certain tax breaks are still available and should
be incorporated in any financial analysis. Reforest-
ation expenses, for example, are eligible for credit
and amortization. A professional tax accountant
with forestry/agricultural experience should be
contacted for assistance when including taxes in
financial analyses. Your county extension agent
and forester should also have numerous publica-
tions on the tax laws and how they relate to the
management of forest resources. Agriculture
Handbook 681, "Forest Owners' Guide to Timber
Investments, The Federal Income Tax, and Tax Re-
cordkeeping," from the United States Department
ofAgriculture-Forest Service (1989), is an excellent
source for tax and financial planning.

Marketing
Marketing your product is no doubt one of the most
important steps in ensuring a profitable invest-
ment. It is also one of the most difficult. The mar-
kets for many alternative enterprises are relatively
new in the south. Getting marketing information
and prices and making contact with interested
buyers can be frustrating and time consuming.
Some products have better defined markets than
others. These often have associations with newslet-
ters and price reports. Other markets depend sole-
ly on word-of-mouth. Marketing expenses and
risks can be included in the sensitivity analysis
(see above) rather easily. These depend on the in-
dividual and the market. Try projects where mar-
kets are good (i.e. sell all or most of the product),
and poor (i.e. sell little or none of the product).
For advice in marketing and selling the product,
contact local professionals and/or county agents
and foresters. It is important to remember that
the market can change very quickly. Don't be too
risky and hold out in hopes of higher returns, but
on the other hand, don't be too stubborn when the
market is not good.

Recordkeeping
The new tax laws are one reason it is important
to keep detailed records of your time, expenses,
and returns although there are many other
reasons. Businesses that keep accurate records
find that decision-making is easier, success can be
detected in a more timely manner, loans can be
acquired more easily and paid off more quickly,
cash flow management is better, and the "right"
price can be better set based on costs of doing
business (Cotton, undated).


Although the alternative enterprise may be taken
on as a hobby or part-time investment, if the land-
owner wishes to determine the financial success
of the operation he or she must keep good business
records. Contact your local Small Business De-
velopment Center for more information on how to
keep records.

Using the Computer in the Financial Analysis
Recent developments in personal computers have
made financial analysis relatively simple and
quick. Although there are only a few programs
specifically designed for forestry analysis many
general programs can be modified for use. These
programs can be used to calculate growth and
yield, present and future values, return on invest-
ment, and other financial information. Re-
cordkeeping and sensitivity analyses can also be
accomplished much easier and with greater accu-
racy on the computer. Also, when cash flow expec-
tations are not expected to be constant the compu-
tation of NPV can be difficult to impossible by
hand. Financial calculators and computers can
handle the task very easily. As the supply of per-
sonal computers increases, more specific programs
should become available. It is important to re-
member however that the results of a computer
analysis are only as accurate as the data used.

Assistance
Never before has there been more assistance avail-.
able to the landowner wishing to begin a new en-
terprise. County extension agents, Florida Divi-

sion of Forestry foresters, the Agricultural Stabili-
zation and Conservation Service, and university
personnel among other public agencies offer advice
and assistance. Often they provide an excellent
referral service to private forestry and financial
consultants, and growers and marketing associa-
tions.
When looking for assistance, check credentials and
talk with as many people as you can. Assistance
is like any product: there is good assistance and
bad. Make sure to include any assistance costs in
your financial analysis.
It is also possible to receive financial assistance.
Although cost-sharing is limited to certain agricul-
tural and forestry crops (for example, the Agricul-
tural Conservation Program, Forestry Incentives
Program, and Conservation Reserve Program),
low-cost loans may be available from government
(U.S. Small Business Administration) and private
sources.









cated the deduction of expenses related to the man-
agement of the business. The kinds and amounts
now depend on the extent to which you participate
in the project.
Certain tax breaks are still available and should
be incorporated in any financial analysis. Reforest-
ation expenses, for example, are eligible for credit
and amortization. A professional tax accountant
with forestry/agricultural experience should be
contacted for assistance when including taxes in
financial analyses. Your county extension agent
and forester should also have numerous publica-
tions on the tax laws and how they relate to the
management of forest resources. Agriculture
Handbook 681, "Forest Owners' Guide to Timber
Investments, The Federal Income Tax, and Tax Re-
cordkeeping," from the United States Department
ofAgriculture-Forest Service (1989), is an excellent
source for tax and financial planning.

Marketing
Marketing your product is no doubt one of the most
important steps in ensuring a profitable invest-
ment. It is also one of the most difficult. The mar-
kets for many alternative enterprises are relatively
new in the south. Getting marketing information
and prices and making contact with interested
buyers can be frustrating and time consuming.
Some products have better defined markets than
others. These often have associations with newslet-
ters and price reports. Other markets depend sole-
ly on word-of-mouth. Marketing expenses and
risks can be included in the sensitivity analysis
(see above) rather easily. These depend on the in-
dividual and the market. Try projects where mar-
kets are good (i.e. sell all or most of the product),
and poor (i.e. sell little or none of the product).
For advice in marketing and selling the product,
contact local professionals and/or county agents
and foresters. It is important to remember that
the market can change very quickly. Don't be too
risky and hold out in hopes of higher returns, but
on the other hand, don't be too stubborn when the
market is not good.

Recordkeeping
The new tax laws are one reason it is important
to keep detailed records of your time, expenses,
and returns although there are many other
reasons. Businesses that keep accurate records
find that decision-making is easier, success can be
detected in a more timely manner, loans can be
acquired more easily and paid off more quickly,
cash flow management is better, and the "right"
price can be better set based on costs of doing
business (Cotton, undated).


Although the alternative enterprise may be taken
on as a hobby or part-time investment, if the land-
owner wishes to determine the financial success
of the operation he or she must keep good business
records. Contact your local Small Business De-
velopment Center for more information on how to
keep records.

Using the Computer in the Financial Analysis
Recent developments in personal computers have
made financial analysis relatively simple and
quick. Although there are only a few programs
specifically designed for forestry analysis many
general programs can be modified for use. These
programs can be used to calculate growth and
yield, present and future values, return on invest-
ment, and other financial information. Re-
cordkeeping and sensitivity analyses can also be
accomplished much easier and with greater accu-
racy on the computer. Also, when cash flow expec-
tations are not expected to be constant the compu-
tation of NPV can be difficult to impossible by
hand. Financial calculators and computers can
handle the task very easily. As the supply of per-
sonal computers increases, more specific programs
should become available. It is important to re-
member however that the results of a computer
analysis are only as accurate as the data used.

Assistance
Never before has there been more assistance avail-.
able to the landowner wishing to begin a new en-
terprise. County extension agents, Florida Divi-

sion of Forestry foresters, the Agricultural Stabili-
zation and Conservation Service, and university
personnel among other public agencies offer advice
and assistance. Often they provide an excellent
referral service to private forestry and financial
consultants, and growers and marketing associa-
tions.
When looking for assistance, check credentials and
talk with as many people as you can. Assistance
is like any product: there is good assistance and
bad. Make sure to include any assistance costs in
your financial analysis.
It is also possible to receive financial assistance.
Although cost-sharing is limited to certain agricul-
tural and forestry crops (for example, the Agricul-
tural Conservation Program, Forestry Incentives
Program, and Conservation Reserve Program),
low-cost loans may be available from government
(U.S. Small Business Administration) and private
sources.









cated the deduction of expenses related to the man-
agement of the business. The kinds and amounts
now depend on the extent to which you participate
in the project.
Certain tax breaks are still available and should
be incorporated in any financial analysis. Reforest-
ation expenses, for example, are eligible for credit
and amortization. A professional tax accountant
with forestry/agricultural experience should be
contacted for assistance when including taxes in
financial analyses. Your county extension agent
and forester should also have numerous publica-
tions on the tax laws and how they relate to the
management of forest resources. Agriculture
Handbook 681, "Forest Owners' Guide to Timber
Investments, The Federal Income Tax, and Tax Re-
cordkeeping," from the United States Department
ofAgriculture-Forest Service (1989), is an excellent
source for tax and financial planning.

Marketing
Marketing your product is no doubt one of the most
important steps in ensuring a profitable invest-
ment. It is also one of the most difficult. The mar-
kets for many alternative enterprises are relatively
new in the south. Getting marketing information
and prices and making contact with interested
buyers can be frustrating and time consuming.
Some products have better defined markets than
others. These often have associations with newslet-
ters and price reports. Other markets depend sole-
ly on word-of-mouth. Marketing expenses and
risks can be included in the sensitivity analysis
(see above) rather easily. These depend on the in-
dividual and the market. Try projects where mar-
kets are good (i.e. sell all or most of the product),
and poor (i.e. sell little or none of the product).
For advice in marketing and selling the product,
contact local professionals and/or county agents
and foresters. It is important to remember that
the market can change very quickly. Don't be too
risky and hold out in hopes of higher returns, but
on the other hand, don't be too stubborn when the
market is not good.

Recordkeeping
The new tax laws are one reason it is important
to keep detailed records of your time, expenses,
and returns although there are many other
reasons. Businesses that keep accurate records
find that decision-making is easier, success can be
detected in a more timely manner, loans can be
acquired more easily and paid off more quickly,
cash flow management is better, and the "right"
price can be better set based on costs of doing
business (Cotton, undated).


Although the alternative enterprise may be taken
on as a hobby or part-time investment, if the land-
owner wishes to determine the financial success
of the operation he or she must keep good business
records. Contact your local Small Business De-
velopment Center for more information on how to
keep records.

Using the Computer in the Financial Analysis
Recent developments in personal computers have
made financial analysis relatively simple and
quick. Although there are only a few programs
specifically designed for forestry analysis many
general programs can be modified for use. These
programs can be used to calculate growth and
yield, present and future values, return on invest-
ment, and other financial information. Re-
cordkeeping and sensitivity analyses can also be
accomplished much easier and with greater accu-
racy on the computer. Also, when cash flow expec-
tations are not expected to be constant the compu-
tation of NPV can be difficult to impossible by
hand. Financial calculators and computers can
handle the task very easily. As the supply of per-
sonal computers increases, more specific programs
should become available. It is important to re-
member however that the results of a computer
analysis are only as accurate as the data used.

Assistance
Never before has there been more assistance avail-.
able to the landowner wishing to begin a new en-
terprise. County extension agents, Florida Divi-

sion of Forestry foresters, the Agricultural Stabili-
zation and Conservation Service, and university
personnel among other public agencies offer advice
and assistance. Often they provide an excellent
referral service to private forestry and financial
consultants, and growers and marketing associa-
tions.
When looking for assistance, check credentials and
talk with as many people as you can. Assistance
is like any product: there is good assistance and
bad. Make sure to include any assistance costs in
your financial analysis.
It is also possible to receive financial assistance.
Although cost-sharing is limited to certain agricul-
tural and forestry crops (for example, the Agricul-
tural Conservation Program, Forestry Incentives
Program, and Conservation Reserve Program),
low-cost loans may be available from government
(U.S. Small Business Administration) and private
sources.









cated the deduction of expenses related to the man-
agement of the business. The kinds and amounts
now depend on the extent to which you participate
in the project.
Certain tax breaks are still available and should
be incorporated in any financial analysis. Reforest-
ation expenses, for example, are eligible for credit
and amortization. A professional tax accountant
with forestry/agricultural experience should be
contacted for assistance when including taxes in
financial analyses. Your county extension agent
and forester should also have numerous publica-
tions on the tax laws and how they relate to the
management of forest resources. Agriculture
Handbook 681, "Forest Owners' Guide to Timber
Investments, The Federal Income Tax, and Tax Re-
cordkeeping," from the United States Department
ofAgriculture-Forest Service (1989), is an excellent
source for tax and financial planning.

Marketing
Marketing your product is no doubt one of the most
important steps in ensuring a profitable invest-
ment. It is also one of the most difficult. The mar-
kets for many alternative enterprises are relatively
new in the south. Getting marketing information
and prices and making contact with interested
buyers can be frustrating and time consuming.
Some products have better defined markets than
others. These often have associations with newslet-
ters and price reports. Other markets depend sole-
ly on word-of-mouth. Marketing expenses and
risks can be included in the sensitivity analysis
(see above) rather easily. These depend on the in-
dividual and the market. Try projects where mar-
kets are good (i.e. sell all or most of the product),
and poor (i.e. sell little or none of the product).
For advice in marketing and selling the product,
contact local professionals and/or county agents
and foresters. It is important to remember that
the market can change very quickly. Don't be too
risky and hold out in hopes of higher returns, but
on the other hand, don't be too stubborn when the
market is not good.

Recordkeeping
The new tax laws are one reason it is important
to keep detailed records of your time, expenses,
and returns although there are many other
reasons. Businesses that keep accurate records
find that decision-making is easier, success can be
detected in a more timely manner, loans can be
acquired more easily and paid off more quickly,
cash flow management is better, and the "right"
price can be better set based on costs of doing
business (Cotton, undated).


Although the alternative enterprise may be taken
on as a hobby or part-time investment, if the land-
owner wishes to determine the financial success
of the operation he or she must keep good business
records. Contact your local Small Business De-
velopment Center for more information on how to
keep records.

Using the Computer in the Financial Analysis
Recent developments in personal computers have
made financial analysis relatively simple and
quick. Although there are only a few programs
specifically designed for forestry analysis many
general programs can be modified for use. These
programs can be used to calculate growth and
yield, present and future values, return on invest-
ment, and other financial information. Re-
cordkeeping and sensitivity analyses can also be
accomplished much easier and with greater accu-
racy on the computer. Also, when cash flow expec-
tations are not expected to be constant the compu-
tation of NPV can be difficult to impossible by
hand. Financial calculators and computers can
handle the task very easily. As the supply of per-
sonal computers increases, more specific programs
should become available. It is important to re-
member however that the results of a computer
analysis are only as accurate as the data used.

Assistance
Never before has there been more assistance avail-.
able to the landowner wishing to begin a new en-
terprise. County extension agents, Florida Divi-

sion of Forestry foresters, the Agricultural Stabili-
zation and Conservation Service, and university
personnel among other public agencies offer advice
and assistance. Often they provide an excellent
referral service to private forestry and financial
consultants, and growers and marketing associa-
tions.
When looking for assistance, check credentials and
talk with as many people as you can. Assistance
is like any product: there is good assistance and
bad. Make sure to include any assistance costs in
your financial analysis.
It is also possible to receive financial assistance.
Although cost-sharing is limited to certain agricul-
tural and forestry crops (for example, the Agricul-
tural Conservation Program, Forestry Incentives
Program, and Conservation Reserve Program),
low-cost loans may be available from government
(U.S. Small Business Administration) and private
sources.









SUMMARY
One of the major reasons new businesses fail is
inadequate planning. A landowner interested in man-
aging a forestry enterprise needs to develop a
thorough management plan. A major component of
the plan is the financial analysis. This analysis in-
cludes an estimate of the magnitude and timing of
all costs and returns involved in production.
The usefulness of financial analysis becomes
apparent when many costs and revenues are spread
out over the production length of the enterprise. With-
out a structured method of analyzing the situation,
the average landowner would have a difficult time
determining if a $100 investment today is worth
$1,000 in 20 years.
This publication was designed as an introduction
to the financial concepts involved in planning and
decision-making. Although the structure for evaluat-
ing your forestry enterprise will remain the same,
each landowner must perform his or her own custom
analysis. This publication was not designed to take
the place of qualified professional advice and assis-
tance. It is hoped that an understanding of the con-
cepts introduced here will help the landowner com-
municate more effectively with those who provide
assistance.


LITERATURE CITED


Brigham, Eugene E 1985. Financial Management: Theory
and Practice. Fourth Edition. The Dryden Press.
Chicago.
Cotton, John. Keeping Records in Small Businesses. US.
Small Business Administration, Management Assist-
ance and Support Services. Management Aids Number
1.017.
Duryea, M.L. (editor) 1988. Alternative Enterprises for
Your Forest Land: Forest Grazing, Christmas Trees,
Hunting Leases, Pine Straw, Fee Fishing, and Firewood.
Florida Cooperative Extension Service, IFAS, University
of Florida, Gainesville. Circular 810.
Hoover, William L., William C. Siegel, George A. Mules,
Harry L. Haney, and Harold E. Burghart. 1989. Forest
Owners' Guide to Timber Investments, The Federal In-
come Tax, and Tax Recordkeeping. USDA-FS Agriculture
Handbook No. 681. Washington D.C.
Sinden, John A., and Albert C. Worrell. 1979. Unpriced
Values: Decisions Without Market Prices. John Wiley and
Sons. New York.









SUMMARY
One of the major reasons new businesses fail is
inadequate planning. A landowner interested in man-
aging a forestry enterprise needs to develop a
thorough management plan. A major component of
the plan is the financial analysis. This analysis in-
cludes an estimate of the magnitude and timing of
all costs and returns involved in production.
The usefulness of financial analysis becomes
apparent when many costs and revenues are spread
out over the production length of the enterprise. With-
out a structured method of analyzing the situation,
the average landowner would have a difficult time
determining if a $100 investment today is worth
$1,000 in 20 years.
This publication was designed as an introduction
to the financial concepts involved in planning and
decision-making. Although the structure for evaluat-
ing your forestry enterprise will remain the same,
each landowner must perform his or her own custom
analysis. This publication was not designed to take
the place of qualified professional advice and assis-
tance. It is hoped that an understanding of the con-
cepts introduced here will help the landowner com-
municate more effectively with those who provide
assistance.


LITERATURE CITED


Brigham, Eugene E 1985. Financial Management: Theory
and Practice. Fourth Edition. The Dryden Press.
Chicago.
Cotton, John. Keeping Records in Small Businesses. US.
Small Business Administration, Management Assist-
ance and Support Services. Management Aids Number
1.017.
Duryea, M.L. (editor) 1988. Alternative Enterprises for
Your Forest Land: Forest Grazing, Christmas Trees,
Hunting Leases, Pine Straw, Fee Fishing, and Firewood.
Florida Cooperative Extension Service, IFAS, University
of Florida, Gainesville. Circular 810.
Hoover, William L., William C. Siegel, George A. Mules,
Harry L. Haney, and Harold E. Burghart. 1989. Forest
Owners' Guide to Timber Investments, The Federal In-
come Tax, and Tax Recordkeeping. USDA-FS Agriculture
Handbook No. 681. Washington D.C.
Sinden, John A., and Albert C. Worrell. 1979. Unpriced
Values: Decisions Without Market Prices. John Wiley and
Sons. New York.








































































' This publication was produced at a cost of $1,544.40, or 51 cents per copy, to provide information on
estimating profitability of a forest enterprise. 12-3M-89.


COOPERATIVE EXTENSION SERVICE, UNIVERSITY OF FLORIDA. INSTITUTE OF FOOD AND AGRICULTURAL SCIENCES, G.L.
Zachariah, director, in cooperation with the United States Department of Agriculture, publishes this information to further the purpose of the
May 8 and June 30, 1914 Acts of Congress; and is authorized to provide research, educational information and other services only to
individuals and institutions that function without regard to race. color, sex, age, handicap or national origin. Single copies of extension
publications (excluding 4-H and youth publications) are available free to Florida residents from county extension offices. Information on bulk
rates or copies for out-of-state purchasers is available from C.M. Hinton, Publications Distribution Center, IFAS Building 664, University of ....o .
Florida, Gainesville, Florida 32611. Before publicizing this publication, editors should contact this address to determine availability.




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