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1. a Help E 3 Fa EE 10 EL lz 14 15 16 20 a4 Ed 20 23 30 az 33 3 Ty TreeCecks manual Fa Mariot Encel TRE 7 y 2 Figure 22 Agricultural crop initialization window Continue takes you to the multiple crop data organization window Write a crop type label next to each year in the 3 year crop cycle The default shown is based on an actual winter wheat feed barley dry pea cycle that is common in eastern Washington All TreeCents editions have this same default case example Make one of your own to represent your region Simply clicking on a crop label takes you to that crop s project data For each crop you list you find one page of expected yields and revenues and four pages of cost categories including preharvest administration harvesting and other costs When you finish one crop Continue to cycle back Select and finish the pages for remaining crops e Crop annual acreage yields and per unit values are entered right after clicking on one of the three crops you just labeled e Pre harvesting costs include activities such as site preparation cultivation sowing seeds among others in dollars per acre The default assumes rented machinery costs Forest Econ Inc 52 5 12 2003 e Harvest costs can be lumped or segregated in acre Coordinate harvest costs with yields e Administration costs include management fees interest in operational costs crop and property insurance and genera
2. taxes Unfortunately in their legislative wisdom both Washington and Oregon called their yield taxes severance taxes Forest Econ Inc 66 5 12 2003
3. It guides you through data needs hides the math and spits out results automatically It calculates four standard business decision criteria to make investment choices easier for you and credible for your investors TreeCents is quick and cheap to use over and over so you can test variants of project designs to search for even higher returns TreeCents can even help you second guess your assumptions and increase confidence in what used to be risky poorly quantified guesses about long run timber futures TreeCents does this by combining logical and mathematical templates to identify and organize cash flows for a wide variety of timber investments Forest owners button navigate to appropriate analyses for their projects Data formats help users identify and include all the relevant factors that affect timber project feasibility Warning flags signal critical data assumptions and help is available on each screen Embedded formulas automatically compute investment evaluation criteria and display them in standard comparison reports so that users can make immediate project choices and comparisons These criteria are in standard absolute and relative financial feasibility measures TreeCents even considers each individual s unique tax environment TreeCents users can second guess investment choices with built in pessimistic and optimistic project outcome brackets or measure the sensitivity of financial assumptions and forecasts by saving scenarios and reeval
4. Crignal Timbor Cost Bass aco S Orignal Timber volume MeFacrey 42 Current Asset Market Value Curent Bare Land Value at Starting Your ffacre WE zu Durant Timber Stand valus at Starting Year Hama stele BREE R EYE Se Sk eeee ry Start fe New EDITION 2 1 Figure 20 Land cost and timber cost basis page 6 3 1 Depletion accounts In the original basis for tax purposes enter the timber account allocation value of your original land plus timber purchase cost When you bought this parcel you allocated some of the parcel cost to timber some to land and some to improvements If you started this stand as a plantation your entry should be zero TreeCents uses basis cost and original cruised purchase volume to calculate a proportional depletion rate The depletion rate becomes a volume sensitive tax deduction from future timber sale gross revenues harvest after harvest until the original timber cost basis is used up There is a basis report button imbedded in the harvest entry pages so you can see the basis distribution Forest Econ Inc 48 5 12 2003 6 3 2 Current asset market value This is an estimate of the land plus timber current market liquidation value sold as a whole parcel not harvested This value is a rough estimate of the financial value of the forest physical capital land and immature stand that becomes tied up in this project design Initial capital value does not affect calculations of absolute crit
5. Econ Inc 65 5 12 2003 Site preparation is manipulation of the land to achieve the best physical soil conditions to enhance plantation establishment success Helms 1998 Soil expectation value SEV soil expectation value also called land expectation value is an absolute financial criterion based on the net present value of expected cash flows from infinite number of plantation cycles The highest soil expectation value regime establishes the maximum value that a buyer could pay for land and gains the guiding rate of return Helms 1998 Thinning a cultural treatment that reduces stand density to improve the growth of the remnant trees Helms 1998 Transportation cost rate the per unit cost of hauling one unit MBF or green tons of already loaded logs for the distance of one mile Upper bound in sensitivity analysis the upper bound identifies an optimistic scenario It includes higher prices and lower costs to replicate the best investment conditions that you might reasonably expect Value per ton fixed the carbon sequestration payment for each ton of atmospheric carbon dioxide fixed by a plantation over its rotation cycle Yield data tree volume tables that predict the total wood volume harvestable per tree at different ages Yield tax rate is a harvest tax levied as a percentage of gross stumpage value Klemperer 1996 The of gross revenue tax distinguishes yield taxes from fixed amounts per unit volume severance
6. Tarer Timis Firses Taxes Firses PET PRESENT VALUES ARE NOT COMPARABLE BETWEEN AL PERMA TIVES oS 78 58 ar ats 75 TE 44 ore Is SE RS IN ATA rei BRT 104 19 PEREP ELERT Hw bo Inierpri Financial Criter SAY AEG TATION VALUES ARF Oit Y COMPARARLF WHEN PROJECTS START WITH RARE LAMA EEES 114 07 MA nA PRED AT 39474 oda St Maan JL eer WA WA rare TELS NE de Coon uT Bus Sel ae fF ia NA Iere EWS sf SN d Fa Aano raDie Rato of Ruri MRR ak BLOAT CALA ARL COMPARARLE OWE Y WLA INTIAL ASS OS ARL Pi Percentage BP fip iip T4 Lay Edl BNI hae ELFI TUS EEO EH E wi ire RELATIVE CATER ARE COMPARABLE GHEY WHEN MTL ASSET VALUES ARE INPUT SET ERE a ey 2i Li cm FEA iiia AgS ESI 5 35 79 16 35 age tg siart fe NEW EOUTION 2 1 Ed Merosoft Excel TRE ATE 2 1 manual Micro Figure 19 Comparative projects financial report When you do begin comparing between unlike land uses use caution Absolute criteria are comparable only when comparing different uses of the same initial assets over the same investment horizon For example if the same bare land acre is being evaluated for a timber plantation or crops or grazing the SEV s and NPV s accurately indicate the value attributed to the same acre by the different uses If you are comparing existing forest NPV s to crop NPV s watch out Comparing projects with different initial capital asset values have an unlike capital scale interpretive problem Bigger to start with is
7. and benefits This time preference 1s measurable and is formalized mathematically by discounting future events using a decision maker s appropriate rate of preference For most of us our financial rate of time preference 1s measured by that risk adjusted discount rate we discussed earlier TreeCents calculates four basic discounted financial criteria that are appropriate in different situations These include two absolute criteria Net Present Value NPV and Soil Expectation Value SEV as well as two relative criteria the Realizable Rate of Return RRR and the Equivalent Annual Income EAI TreeCents calculations are made in per acre terms and reported in pre tax and after tax terms If you are perverse enough to want to study the formulas we relegated them to the BUFF appendix Big Ugly Financial Formulas Two basic rules for legitimately comparisons of financial criteria are 1 evaluating different uses of the same initial capital over 2 the same investment horizon If either condition does not hold distortions are possible and comparisons need to be made with some Care 5 1 Interpreting absolute criteria Absolute implies that a criterion measures the actual money value of the project in current equivalent terms Since we are dedicating an initial asset such as land or land plus timber to a project another way of interpreting NPV or SEV is an estimate of how much this project makes my initial asset wort
8. before planting cuttings Pruning the removal of live or dead branches or multiple stems from a standing tree with the purpose of improving the tree form or its timber quality Helms 1998 Pulpwood roundwood logs sold for fiber that will be used in the manufacture of paper and allied products Realizable rate of return RRR a relative financial indicator used to compare projects on an annual rate of return basis Davis et al 2000 RRR is a modern formulation of the internal rate of return Remnant trees standing trees left over after thinning Rotation age the tree stand cycle length in years It is the total time between the plantation establishment and the final harvest Helms 1998 Sawlog a log that will be sawn into lumber meeting minimum regional standards of diameter length and defect Helms 1998 Sensitivity analysis process to measure how investment analysis results are affected by changing assumptions such as costs prices revenues discount rate or volumes When the investment decision changes significantly with a change in a particular assumption it is considered sensitive to that assumption Klemplerer 1996 Severence tax rate a harvest tax levied as a fixed payment amount per harvest volume unit Severence taxes are distinguished from yield taxes on gross harvest revenue Unfortunately in their legislative wisdom both Washington and Oregon call their yield taxes severance taxes Forest
9. capital expressed as an annual percentage rate TreeCents uses it as a discount rate to convert a future cash flow to its present value equivalent Klemplerer 1996 Equivalent annual income converts the Net Present Value into an annuity of net cash flows to be compared with annual agricultural crop returns Forest Econ Inc 63 5 12 2003 Extracted volume the total volume removed when a thinning is done Fertilization the addition of nutrient elements to the soil to improve growth increments or overcome nutrient deficiencies Helms 1998 General overhead an annual cost that covers office expenses legal and accounting fees and utilities Smathers 1999a Ground spray application of chemical products from the ground Harvest final cutting where crop trees are extracted Helms 1998 Herbicide application chemical product used to kill or control the growth of undesired plants Helms 1998 Labor includes human hand labor and machinery operating labor used for production activities Lower bound in sensitivity analysis the lower bound identifies a pessimistic scenario It includes higher costs and lower prices to replicate the worst investment situation that you might reasonably expect Machine rental is a payment for machine use charged in the year that the machine is employed Management cost management is a specific activity measure or treatment practice in a forest stand Helms 1998 Management costs include all
10. classic formula We ve left out all the intertemporal adjustments and contingent cash flows that really complicate the forestry applications formulas 2 B 7 C NPV 2 G i i i Where NPV Net Present Value acre Costs incurred in period t acre Benefits realized in period t acre costs incurred annually acre year benefits realized annually acre year Year costs incurred or benefits realized Discount interest rate SEV Soil Expectation Value is calculated by an ingenious formula first thought up by an obscure Austrian forester Martin Faustmann in 1849 Although used by Europeans since then it was not discovered by Americans actually Ralph Marquis until the early 1950 s It is specified as R R gt G gt B 0 a eae a 1 7 1 i Where V Soil Expectation Value acre Costs incurred in period t acre Benefits realized in period t acre costs incurred annually acre year benefits realized annually acre year Cycle length or Rotation age years Year costs incurred or benefits realized Discount interest rate ES wa w Forest Econ Inc 60 5 12 2003 Whew Aren t you glad to avoid this mess by using TreeCents Remember TreeCents actually does more complex formulations that allow for many more cash flow patterns conditional cash flows such as taxes as well as costs and values that change over time with inflation and m
11. costs incurred to execute those activities Management fee the costs of annual supervision and planning Heilman et al 1995 Marginal federal income tax rate a tax rate paid to the federal government for all the ordinary incomes from an additional investment Klemperer 1996 Taxable poplar plantation income is treated as an income that supplements existing ordinary income from other sources Marginal state income tax rate a tax rate paid to the state on all ordinary incomes State taxes are deducted from gross incomes before federal income taxes are calculated Klemperer 1996 Other costs costs not included in existing cost categories that are relevant to the investment analysis Planting all the activities related to sowing crops in seeded agriculture or vegetatively establishing tree crops Forest Econ Inc 64 5 12 2003 Planting costs includes all the costs incurred in planting practices such as cuttings plant fertilization and herbicide applications Planting subsidy money from an outside source for doing carbon credit sequestration paid on the plantation date Precommercial thinning reducing the stand density number of trees per acre for reasons of forest health product quality or habitat structure without sale of the removed cellulose Property insurance insurance purchased to protect the property or project income against unexpected events Pre plantation costs costs related to all the practices that occur
12. data page 3 5 7 1 Ordinary and capital gains income taxes Timber income can be subject to both federal and state taxes of two types 1 ordinary income taxes and 2 capital gains income taxes Ordinary income is like wages and interest These incomes are typically taxed at higher rates with supplemental taxes usually 15 3 for self employment taxes Enter your marginal highest applicable tax bracket federal and state income tax rates in percentage terms Capital gains taxes are lower taxes due on the sale of long term capital assets held more than year and no self employment taxes apply Again enter your applicable federal and state capital gains rates in percentage terms Some states such as Idaho have capital gains exclusions instead so convert them into equivalent percentage rates For example a 60 capital gains exclusion is the same as a 40 of income taxable with an 8 state ordinary income tax rate equates to 0 4 x 0 08 0 032 or 3 2 per cent A complicating factor is that state tax payments are typically deductible in calculating federal income taxes TreeCents solves this by converting your separate entries into a single post deduction effect tax coefficient for each tax category You no longer have to adjust for this interaction yourself Forest Econ Inc 34 5 12 2003 3 5 7 2 Timber and property taxes State and local timber taxes can be particularly variable between jurisdictions TreeCents can be adapted to many
13. grow However future volumes are extremely variable by soil productivity climate stand age management treatments and the mix of tree species and size classes left by previous harvests Be consistent within any one project analysis Use yield data specific to your project conditions TreeCents does not predict timber yields it only calculates their financial implications Timber yields are highly variable and unique to silvicultural regimes and different land qualities Predicting yields is a big job for dedicated and complicated growth and yield simulators You need quantitative yield estimates from simulators your own experiences or another knowledgeable source such as a consulting forester or a forestry extension agent TreeCents needs estimates of specific gross harvest volume estimates for each harvest page by each species value group and by product type If you really have detailed data TreeCents also has percent defect entries that reduce gross volumes to net scalable volumes for sawn products as log payments are based on net scale Forest Econ Inc 30 5 12 2003 Of course you may supply less detailed or accurate guesstimates and still get approximate financial criteria that will aid decisions but you will weaken their reliability TreeCents contains some example embedded growth and yield data to help you visualize how tree stands typically grow This data is included as a default for user familiarization and demonstration purposes
14. land uses or reforestation plantations that start after clearcuts of previous timber stands In either case SEV assumes that timber 1s grown in long run cycles that are established harvested and reestablished at fixed regular intervals called rotations SEV is easily compared to bare land use values for other regimes or other products such as annual crops or grazing As SEV approximates bare land value it is really useful in cutover land purchase or sales decisions For example if the market price of an acre is 600 acre and your best forestry SEV is 350 acre the acre is over priced by your evaluation assumptions SEV estimates are also valuable for loan collateral calculations or for tax values of bare land ad valorem property taxes Forest Econ Inc 42 5 12 2003 User Tip Positive SEV represents the production value of land per acre in this investment while still earning the guiding rate of return The highest SEV among alternative regimes implies the value of the land in forestry allocation Negative SEV regimes imply zero land value from this timber use try a less intensive less up front cost regime In comparing options a higher SEV identifies a higher return from a management option However there are lots of negative SEV s in forestry If I win the lottery I guess PI keep tree farming til its gone That story underscores that it is really easy to specify overly intensive timber projects with lo
15. o No B 5 u ot ps 4 i Fa Microsoft Excel TRE vA za AA Figure 1 TreeCents initialization window Pressing START transfers you to the program introduction window Figure 2 Whenever you press the EXIT you have a choice to exit without saving this session or exit saving the last data set used as a project data set Welcome to E Welcome to TreeCents 2 1 by Forest Econ Inc 2003 Decisions about timber investments can be so complicated that forest owners may be tempted to avoid or guesstimate the financial computations necessary to quantify and evaluate investment projects TreeCents is a user friendly EXCEL based financial analysis assistant program that guides forest owners and consulting foresters through a personalized financial decision evaluation TreeCents helps owners compare timber investment regimes and land use alternatives between new plantations existing forest stands and other common rural land uses The TreeCents menus organize the resource growth cost and return data required for a complete analysis TreeCents automatically runs the appropriate formulas for calculating financial analyses and generates criteria to compare investment projects in before and after tax terms It also measures pessimistic and optimistic bounds for timber investment projects and can be used to test the effects of investment assumptions and alternative futures We at Forest Econ Inc designed TreeCents to confidently
16. only In any harvest entry page click on Yield Data Follow the buttons for different yield types to a set of example yield tables and yield curves figure 15 for some typical timber stands in this region Plantation Timber Yield Reference Tables NATURAL STOCKING PLANTATION WITHOUT THINNING PLANTATION WITH THINNING Default Timber Yield Tables Inland Northwest Edition Plantations Douglas fir 500 tpa thin to 100 tpa 50 yrs Thin 50 volumes in last row Gose Yolume MBF acre AGE sI 50 SI 70 sI 90 0 0 Thinned Plantation Merch Yield mT by Site Index 4 0 8 8 9 6 13 7 17 8 00 oo os oe ee ae 0 7 me mo 22 1 100 26 2 20 30 40 50 60 70 80 90 100 St50 Age years a SI 70 e S90 Yolume extracted at year 50 Thin 50 0 7 E B Source Stage Albert David Renner Roger Chapman 1988 Selected Yield Tables for Plantations and Natural Stands in Inland Northwest Forests USDA Forest Service Intermountain Research Station Ogden Utah Research Paper INT 394 Figure 15 Typical yield table amp curves The thinned plantation example in figure 15 shows how harvestable tree volume accumulates with age Higher site quality land produces substantially higher volumes over time Managed stands typically produce more than unmanaged This example demonstrates how early thinning affects later volumes Thinning can reduce future harvest total volumes bu
17. optimistic scenario costs drop to 180 per acre 90 of a best guess value and in the worst case they rise to 220 per acre 110 of a best guess value The same would happen for prices As a result the default pessimistic lower bound would have 10 higher costs and 10 lower prices and the default optimistic upper bound scenario would have lower costs and higher prices Set your own sensitivity range Fill in the percentages that you worry your prices may vary in the best and in the worst of situations If you are worried about an extremely variable future use a larger size bracket 10 entries are less certain a larger adjustment of Forest Econ Inc 20 5 12 2003 both base costs and benefits and a 5 entry means that you are more confident of future conditions TreeCents reports both brackets to help users hedge and second guess decisions that many analysts make only with base case financial criteria 3 5 2 3 Timber prices page Future timber harvest stumpage values vary by volume location species logging costs and log quality TreeCents calculates mature standing timber s stumpage value from known mill log values and logging costs As TreeCents is designed for long run investment evaluation it is lower resolution than typical timber sale accounting programs TreeCents recognizes up to six species value groups and five product type groups Most users won t even use the whole matrix of thirty value group product combinati
18. product groups just as you did in the plantation tutorial The last harvest entry year should be the same as the one entered in the project identification page Volume entries are deceptively simple to make in TreeCents but may represent some very complex silviculture Successive growth responses in mixed even age or uneven age regimes can be very counter intuitive Growth and yield responses to different residual stocking size class and species mixes from the first harvest make subsequent entries contingent on previous entries For this reason TreeCents allows complete respecification of harvest volume by value group and product group at each entry Forest owners using uneven age silvicultural regimes should definitely refer to an expert or an outside source growth and yield simulator to estimate the harvest volume and stand growth interactions for you Forest Econ Inc 47 5 12 2003 6 3 Land cost and timber cost basis page This page 1s very different from the plantation module figure 20 There are two important new entries that are unique to existing stand investments These relate to the original cost basis of the stand for calculating capital gains taxes W Ge Ek Yew pmet Format Took Daa Window Hep Aroa Pieza retype entries with your own information IF you Bawa the bowas af 6 Trescents uses the dafault data If a E dala lento tel tel ak and Treecents assumes a zero entry Default values are shown for user training pumpases
19. reduce your timber investment anxiety at low cost while improving your forest s long run profitability However investments are inherently risky and subject to data market and ecological variability Their ultimate profitability remains the timber owner s responsability Figure 2 Introduction window Forest Econ Inc 9 5 12 2003 Read the introduction window at least the first time It tells you what we think TreeCents can do for you It also reinforces our belief that TreeCents only organizes and automates the tedious mechanical parts of timber financial analyses The really critical thinking parts of timber investment decisions still rely on you Feasible timber projects depend on your own perception of the variables that affect creative timber project decisions and your own personal evaluation of decision criteria Now press CONTINUE Pressing any WINDOWS close symbol in the upper right of the window takes xX you directly back to the start window It will save your last entries until you overwrite them or close TreeCents without saving 3 1 Choosing an analytical path TreeCents project specifications and calculations are designed as a series of branching paths to keep users from getting lost among 150 program windows Use buttons to choose path branches and move forward fork by fork along the preferred branch If you go too far or want to revisit something behind you you can button Back or Cancel in the reverse direc
20. 6 5 12 2003 reader is a free download from the Adobe company home page www adobe com When we tun TreeCents we usually load the manual first into its own background window so we can toggle in and out of it while we re working in TreeCents 2 3 Installing the TreeCents Program To install TreeCents place the TreeCents CD in your CD reader It s the pop open shelf that you thought was a cup holder Most personal computers read the CD drive contents as soon as a CD 1s inserted TreeCents can be run directly from our CD but you should copy the TreeCents file directory onto the computer hard drive This increases operating efficiency and allows you to save project data files We suggest that you copy the whole TreeCents directory file from the CD into the my documents file on your computer The TreeCents directory contains two subdirectories One is the EXCEL program file and one is another subdirectory designed to store your initial default data files It is also a good place to store your future project files You may need to change some WINDOWS settings First your computer s EXCEL security settings must be compatible New MS OFFICE installations are usually set with high security defaults to minimize virus problems To run TreeCents and most other template programs you must reset the security level In EXCEL select the Tools menu Under Options select Security and then Macro Security Reset Macro Security to medium This allows
21. EXCEL to read and process the TreeCents programming macros Medium security level is sufficient to detect and resist most system viruses TreeCents production computers are virus protected and we used the latest Norton Antivirus version to double check that TreeCents distribution disks are virus free Most WINDOWS screen resolution defaults are compatible with TreeCents programming Your TreeCents CD is designed for a small monitor because we expect that most users will also want to run TreeCents on their laptops as well as on their desktop personal computers If the TreeCents windows aren t well matched to your display there are two solutions You can reset your whole display resolution Go to Control Panel select Display select Settings Move the screen pixel indicator to your desired resolution You can also scale the screen resolution using the EXCEL Zoom feature under the View menu Forest Econ Inc 7 5 12 2003 Finally using the Full Screen option under the EXCEL View menu really makes TreeCents windows large clear and bright Make sure that program icons still appear in your start toolbar to allow multi tasking Being able to toggle back and forth to the manual and to other data sets really increases your analytical efficiency 3 0 RUNNING TreeCents Once TreeCents is loaded it is easy to run Click open Microsoft EXCEL Close any other EXEL files that you may have been working on because running TreeCents may close t
22. The harvest year entry is the number of years e g 50 years since stand establishment in year zero Do not enter a date here e g 2005 or TreeCents will assume rotation cycle lengths thousands of years long You ll never live to see them besides discounting revenues for that long makes them really tiny The fixed cost entry allows users to enter a fixed per acre harvest cost that is unique to that harvest entry Each harvest entry has its own page but all four have identical formats If you plan less than four harvests enter intermediate harvests in order starting on harvest page 1 Make sure any unused harvest pages at the end have zero entries Your last harvest of this regime s cutting pattern must have a harvest year corresponding to the rotation cycle length that you specified on the project identification page earlier Otherwise your SEV and NPV calculations will have a built in error Once a plantation establishment and harvest pattern is entered TreeCents assumes that pattern cycle would repeat indefinitely However the contribution to present value of a distant future cycle can be quite small particularly in slower growing forests This financial effect is visible in a comparison of project financial criteria NPV present value of a single cycle will be slightly smaller than SEV present value of infinite cycles Timber financial analyses are driven to a large extent by expected physical harvest volumes 1 e how fast your trees
23. Tree entso Timber Investment Analyzer Inland West Edition 2 11 Easy to Use Reference Manual May 5 2003 Program Upgrade May 12 2003 manual revision Photo by Alison Meyer Programming and Text by M Eugenia Camelio MLS Charley McKetta Ph D Forest Econ Inc Forest amp Natural Resource Economists 1150 Alturas suite 102 Moscow Idaho 83843 208 883 3500 208 301 4634 www forestecon com forestecon moscow com 1 0 2 0 3 0 4 0 5 0 TreeCentso Inland West Edition 2 11 Timber Investment Analyzer Easy to Use Reference Manual Subject Look up Table WELCOME TO Tree ents 1 1 What TreeCents does for you 1 2 Its still your timber investment decision INSTALL Tree Cents 2 1 System Requirements 22 Installing the TreeCents Manual 2 3 Installing the TreeCents Program RUNNING Tree ents 3 1 Choosing an analytical path 3 2 Choosing timber options 3 3 Formulating new timber plantation projects TreeCents data sets 3 4 Designing your timber investment regime 3 5 Timber data needs Timber data organization Project ID amp basic economic data Preplantation amp planting costs Management practice costs Harvest entry volumes Annual revenues amp costs User s personal tax data 3 6 Automatic project calculations Treefents DATA SETS AND REPORTS 4 1 Saving TreeCents data sets 4 2 Summary reports Cost summary report Revenue summary report Individual project financial criteria Comparative p
24. ability between completely different types of land use investments It says The asset that I tied up plus all the extra money I invested is working this hard If you did not enter a normalization value your RRR will read NA not available The Equivalent Annual Income criterion EAI makes irregular timber income easy to compare with annual agricultural net crop returns EAI converts a net present value absolute criterion into an equivalent annual income This treats the irregular long cycle cash flows of the asset NPV as if they were regular annual net cash flows so many net acre year generated by the project Equivalent average net cash flows are easy to visualize Projects with negative EAI s are to be avoided The project with the highest EAI should be preferred Klemperer 1996 TreeCents EAI s are also adjusted by initial asset values to allow comparisons of different scale projects 5 3 Comparing project feasibilities There are two important interpretations in financial choices First is any single project financially feasible i e are benefits bigger than costs in the long run Second among multiple project options which is preferable Where is the best place to plant your hard earned cabbage Table 1 indicates that the basic interpretations are simple to make Forest Econ Inc 44 5 12 2003 Table 1 Quick Project Feasibility Criteria Indicators Good Project Best Project i For NPV and SEV a positive value
25. and bare land property taxes Then there is one set of five AUM revenue and management cost pages These include Forest Econ Inc 53 5 12 2003 e Animal capacity and revenue page allows you to enter up to three animal types that may use the same pasture over a grazing season Units are in months of use so the sum should be less than the grazing season length As western grazing capacity is often measured in acres per AUM rather than AUM s per acre allocate total pasture use rates to a single acre equivalent Eastern AUM figures tend to be significantly higher Revenue prices should be in gross pre tax terms e Pasture preparation costs include any practices for annual pasture grass establishment as well as maintenance of perennials e Administration costs include management fees interest in operational costs crop and property insurance and general overhead General overhead covers all unallocated costs such as legal and accounting fees utilities etc e Animal control costs include the land owner s costs of maintaining herd control and separation The lease holders costs should not be included e Other costs introduces any extra cost not previously listed Do not enter land rental costs as you are calculating land value and liquidation value for normalization was entered on the initialization window 7 4 Comparing alternative land use results Alternative land use results are easy because they always start with bare land unless
26. and investments may not exactly fit yours particularly in imbedded assumptions about owner profiles and financial behavior in forecasting and taxes And finally although we have provided guides for using TreeCents financial criteria it is remains the land owner s responsibility to identify and choose profitable projects 2 0 INSTALL TreeCents TreeCents installs quickly from this CD It will run immediately on most computers with WINDOWS operating systems Some may need a few system adjustments 2 1 System Requirements TreeCents is designed for IBM or clone personal computers with a resident MS WINDOWS 95 or later operating system A CD reader is required TreeCents is an EXCEL based program with VISUAL BASIC commands so EXCEL 97 or later must be preinstalled TreeCents is getting larger with every upgrade Older Pentium II 266 Mhz processor and 64 Megabytes of RAM will still run TreeCents but expect slow program loading and hesitant operations Faster processors and more memory significantly improve loading and calculation speed Loading takes about 20 seconds on my 2 Ghz machine but Operations are almost instantaneous 2 2 Installing the TreeCents Manual You re already reading the manual so you must have seen this part in the CD readme file The TreeCents manual is in Adobe pdf format to make it easy to read and hard to change You must have Adobe Acrobat Reader to read pdf formats Acrobat Forest Econ Inc
27. arket shifts The Realizable Rate of Return RRR is calculated as the project duration root of a ratio between the future equivalent sum of benefits to the present equivalent sum of costs This modern formulation of the Internal Rate of Return IRR does not have the latter s math foibles nor interpretation glitches It is generally computed as follows n XB RRR i OS ET t 0 where RRR Realizable Rate of Return i Assumed reinvestment rate R Project life B Revenues gained in year t C Costs incurred in year t The Equivalent Annual Income EAI looks like the simplest formula but remember that it is a normalization adjustment of the sometimes hairy NPV It is calculated as EAI NPV i where EAI Equivalent Annual Income NPV Net Present Value i Discount rate TreeCents artificially normalizes both the RRR and EAI further to recognize returns to initial project capital when users supply initial asset liquidation values TreeCents subtracts these as a year zero cost prior to RRR and EAI computation Forest Econ Inc 61 5 12 2003 TreeCents Data Sources and User Supplied Data Nora Creek Forest 2003 Log merchandising costs and distribution patterns personal communication Northwest Management Inc 2003 Current delivered log prices in Inland Northwest Market Report lt nwmanage consulting foresters com gt Seven Ridges Forestry 2003 Inland west typical timber management regimes
28. but it includes a reference window option to help you interpret each of the criteria You will also find a jump navigation button in this report Older TreeCents versions required users to back down the analysis trail to make revisions Newer versions have a Revise Project button that takes you right back to the correct project start window This greatly speeds up the project redesign process and sensitivity analyses User Tip Rerun the same project several times with changes in the practices and outcomes This is an easy way to search for a timber investment s most profitable management regime Make a permanent record of variants for your management plan Relabel each variant and save data sets and reports together 4 2 4 TreeCents comparative project financial report The comparative projects report has the same format as the individual report but results are repeated in columns for each of four possible land use projects The comparative project report displays all four criteria for four active projects simultaneously figure 19 This is an advanced report that requires users to enter data for several different project types before use In this tutorial your plantation investment is being compared to three unrelated default training examples At this stage comparative project criteria will have little meaning to you Forest Econ Inc 39 5 12 2003 Aitoreative Avterrative differmatrre Before Aer Before Aier felore filter Timmer
29. clicking on the preferred category The default case is areal plantation example to provide a data formatting guide The default data is only a training demonstration and probably does not reflect your project s unique specifications Write over or erase the default project as you build your own first project By entering one Forest Econ Inc 17 5 12 2003 project and saving it you create your own default case that will require only minor data changes from project to project 3 5 2 Project Identification and basic economic data There are five pages of project ID and basic data Access each page by clicking on the file tabs The tabs suggest an entry order but you can enter or reenter in any order There are four process assist buttons Reset returns a page to its original default entries Back takes you to the previous window Help gives you definitions explanations and warnings It may also describe how TreeCents uses data and critical assumptions OK says T m done and returns you back to the data organization window so you can start another data category Remember that TreeCents calculates all project criteria on an average per acre basis Timber investments may be hundreds of acres but you should apportion project level costs to their per acre equivalents 3 5 2 1 Discount rate and inflation This page figure 8 labels each project s unique identity Users should invent their own project labeling system logic so t
30. d values listing format as found in annual costs Their mathematical treatment is quite similar TreeCents automatically adjusts for inflation over the annual payment stream Enter label number of units per acre and values per unit 3 5 6 2 Stewardship subsidy revenues Many private forests qualify for incentive payments from public agencies Examples include silvicultural practice cost shares timber stand improvement incentives conservation reserve payments wildlife habitat enhancement etc TreeCents recognizes that subsidies come in two forms 1 discrete incentive payments and 2 short annual spans of payments You label and choose figure 16 entries as you see fit Although TreeCents is organized as two payments each having a single plus annuity subsidy the mathematical treatment is such that you can separate these as needed Carbon credit and stewardship subsidy annual revenues are treated in separate category windows Forest Econ Inc 32 5 12 2003 Annual Rew amil Slewaniship Subsidirs Fiease retype entries with your own information IF you leave the bowes asb Treeents uses the default data If a cost EE TRR EET E DAE Oa EENE A Do eR RES eee eae Lear bairig papas Pri tine 1 Ti Quantity Value Proaction Subichy years Uritsfacre Hunit FSERSEE ee Starting Ter Erwig Yi ila Maintenance Subsidy years rears ffvear i a a ae et fa fk i ba Practice 2 Timing Quantity Value Practice Subeicty ym in
31. data or read reports We believe in backing up work every time that it is possible Press Save New Data Set Forest Econ Inc 36 5 12 2003 and TreeCents first warns you what to expect in the save routine Then it automates saving the project data in typical EXCEL data set files that can be located in any directory of your choice TreeCents uses EXCEL to navigate into your desired save location You can either write over a previous file by using the same file name or creating a new file specification by changing the file name We suggest a character file name for individual projects with a numeric suffix for specification variants Warning Do NOT try to Cancel from the EXCEL file list These data sets are organized and well labeled so you can read them in EXCEL without TreeCents If you print them out they make good project variant references in a management plan appendix If you are working with a forestry consultant who also uses TreeCents you can send TreeCents data files back and forth electronically and use them to communicate regime fine tuning suggestions 4 2 Summary reports All report windows have similar tabular formats and program functions You can view reports on screen Some are several pages long so you may have to scroll down You can Print them for immediate hard storage The print routine automatically transfers a formatted print file to the default printer 4 2 1 TreeCents cost summary report This report lists the co
32. dd in the SEV value of the intended replacement plantation from the plantation run It goes into the fixed harvest revenue slot of year h This says to TreeCents In year h I got both 1 the clearcut final harvest revenues along with 2 the year h equivalent of starting a subsequent use of the bare land as a plantation TreeCents does the necessary SEV entry inflation for you 7 0 NONTIMBER INVESTMENT ALTERNATIVES Rural land can produce more than trees In most landscapes economists can predict the zones where the crops forests and pastures will occur Picking the optimal land use depends on a combination of relative soil productivity for different uses and the effect of location on production costs hauling costs and delivered crop values At the intersections of these zones the optimal land use may hinge on small differences TreeCents can help you evaluate whether land use changes are financially desirable using the same criteria we used to evaluate timber projects Start TreeCents as usual At the land use choice window this time select Alternative Land Uses In the next window figure 21 select between Crop Land Uses and Pasture Land Uses It s a simple choice between cultivation and grazing Forest Econ Inc 50 5 12 2003 E Ge E Yew merl Foma Ios Gaa Wike Hep Acro Ex A B i E F E 24 aaas e sek ep aee sl ra Siart Ty Treetents manual Fal Mrmot Excel TRE Figure 21 Alternative land use ch
33. different tax system combinations by choosing your tax data entry appropriately Users should specify their situation and zero out other options Some states have constant annual ad valorem property taxes called forest productivity taxes A small annual land productivity tax coupled with a harvest yield or severance tax is common elsewhere A yield tax is a percentage of gross harvest revenues so enter this one in percentage terms A severance tax 1s a fixed payment rate on harvest volumes TreeCents allows for different rates for board and tonnage volume units This category gets really messy sometimes Some western states call their yield taxes severance taxes but use TreeCents definitions consistent with national tax literature please to make the math work In Idaho forest owners may change between a productivity tax or land and yield every ten years Finally these taxes are deductible against income taxes Not to worry TreeCents takes care of tax system interactions automatically for you There are more critical analytical assumptions embedded in TreeCents tax calculations than anywhere else TreeCents assumes that this single acre is managed in the contest of other timber investments and in the context of other ordinary income TreeCents assumes that tax minimizing timber owners will be tax savvy active managers Tax savvy implies that owners know the tax regulations and how to profit from them Active managers are those who log 100 h
34. e trends page Prices change over time TreeCents already recognizes inflation and adjusts for it but sometimes long run market shifts can cause price and cost trends that differ from inflation Users may define different 20 year trends for the major price and cost categories These may be either positive e g caused by tightening log supplies or negative e g increased competition from other building products They should be entered as an average percentage per year in excess of or below expected inflationary changes TreeCents limits expected trend changes to 20 years Percentage changes have large mathematical effects and markets usually adjust to stabilize prices and costs in the long run Forest Econ Inc J2 5 12 2003 3 5 2 4 Harvest costs page Harvesting costs include all the logging practices necessary to convert standing trees into logs loaded on a truck prior to hauling Again TreeCents is a long run project calculator not a timber sale evaluator so resolution is lower However some log products require different logging steps and equipment so TreeCents recognizes different average logging costs by product by unit of measure for each product type Cost can be entered either by five logging cost categories or total logging costs NOT BOTH figure 10 ay A e ER yer pest Fma Took Qaa ircker Hep Acrobat A 6 C En E G H Please retype entries with your cavn infomation If yaou leave the bores as bs TreeCents uses t
35. ect labels in the list with the RRR after tax results that you got by that criterion You have the option to list only the base case results or all of you pessimist base and optimist findings Press the rank button and TreeCents ranks the base case RRR of all the projects and takes you to a tabular report that can be printed with a button TE 5e Ek Yew puert Formal Tous Daa Window Heb Ae i m RRR after Lan Doulas slanka l l l Figure 23 Comparative projects window The more interesting feature is to graph the ranked projects In the tabular comparisons report press Plot Results That automatically calls graphical ranking and Forest Econ Inc 55 5 12 2003 generates a formatted ranked projects graph figure 23 Although ranking is for the base case this graph presents a visual comparison of project brackets as well In the default example case projects 3 and 4 have only slightly smaller RRR s but very tight i e confident brackets Many forest owners would choose a certain good return over a highly risky one that was only slightly better E Micnmsott Exel TREBCEHTS xls Riadny GB Sie Ee yew pmet Format es Gots Window Hip Acrobat Type a question For hai woe DEHN GRY WRF oem Bao i ao BQ Al i a Lower Bound ee BO Upper Bound SESEGRSE 10 j u 16 19 20 21 2 24 EJ aT EJ EJ 7 EA Figure 24 Ranked projects graph 9 0 LIMITATIONS We created TreeCents to help i
36. egories logic and measures that are common in forest Forest Econ Inc 13 5 12 2003 management Behind the scenes TreeCents reorganizes all the data into formats needed for financial analysis TreeCents data sets are saved in a unique EXCEL format necessary for the program to reread each entry accurately However each data set is organized so that you can read and interpret them directly in EXCEL without TreeCents TreeCents data sets are designed to be printed out as permanent planning records 3 3 1 1 New data sets As anew TreeCents user you ll choose Use New Data Set This takes you to the timber plantation data organization window The timber investment project data requirements are discussed beginning in section 3 3 2 but first consider what a data set 1s doing for you Your new data set collects organizes and stores project data for you Of course that helps you set up the initial analysis of this particular project but just as important it makes subsequent projects quicker and easier to design Over 50 of TreeCents timber data will be common to all timber projects so why reenter Just call up a previous project and write over the entries that are different In practice many analyses are just minor adjustments of a previous project regime In these cases over 95 of previously entered project data will be reused So take a little time to organize label and save project data sets It will save you lots of time later We l
37. ep and planting You will have intermediate practices such as pruning and thinning Finally you will have outcomes particularly volumes and values of timber harvests spread over the project life TreeCents data organization helps you make orderly sense of all this information Forest Econ Inc 16 5 12 2003 3 5 1 Timber data organization window The timber plantation data organization window figure 7 is really a menu It is designed as a starting place to help you organize the types of financial and forestry data needed to analyze your timber plantation investment Go to any management data category and enter it by Left Clicking on the chosen data category button After filling in one category Back returns you to this organization window in a loop so that you can choose another category When you finish entering data in all the categories press Continue to complete the analysis If you ignore a page TreeCents uses the default data stored in it as part of your respecified project At every stage either Help or Definitions will answer many questions Quit returns you to the TreeCents Introduction window W Ele E ye peet Foma Took ala Wreker elp Acrobat iE a I EE E H 1 Piw Panlalinn Hiv Mala Sarl rd start fe Now EDITION 2 1 Fa Merosot Excel TRE a TE 2 1 manual Micro Figure 7 Data organization window TreeCents recognizes seven plantation data categories Each category can be accessed for data entry in any order by
38. eria but is subtracted as a cost 1 e you could have sold it and didn t in relative ones This recalibrates relative criteria so they will estimate return rates to the base asset capital 6 4 NPV calculation assumptions Existing stand calculations vary in another important way from the plantation module You are allowed eight harvests that do not repeat as an infinite cycle of identical regimes The reason for this format is to recognize the potential for extreme harvest variability that happens in mixed even age and uneven age regimes Unfortunately it does introduce some problems First NPV s are only technically comparable if the initial project assets are the same alternative treatments are valued over the same time horizon If you spread one regime s eight harvests over forty years and the others over 100 you introduce time biases into the evaluation criteria The easiest solution is to design regimes over the same duration For example you could compare five 30 year spaced entries to three 50 year spaced entries This would eliminate time difference bias Second if the last harvest is a partial cut and leaves substantial volume for an unmeasured ninth entry project NPV will be slightly understated because it ignores the intentional build up of stand capital in the silvicultural design Usually this effect is so far into the future that it is small However it can easily be corrected for by a mental slight of hand Just assume tha
39. es in the years zero and 1 as needed TreeCents sums these early establishment costs separately as their federal income tax treatment 1s significantly different TreeCents assumes you are an active manager under IRS timber tax rules and automatically calculates the 8 year tax planting cost amortization including the 10 federal income tax credit on 95 of the costs and deductions against ordinary income Forest Econ Inc 25 5 12 2003 gt E Ble But yee peet Fgm Took Bala Wick Hep Acrobat E E D E Pre planlalion and PHanling Cost cee ee ee es LL Se ee ce Se ee es Sa ee es ee or a oT oo oT oo T_T _ 78 Se ee ee oT a SS ee ee Se ee ee Se ee a ee o_o a O_o 4 11 13 15 16 16 19 20 2 24 25 25 24 2 M 36 Figure 12 Preplantation and planting costs window 3 5 4 Management costs TreeCents recognizes six categories of management costs on separate data entry pages example figure 13 Management costs are of three types infrequent timber stand improvement TSI costs other irregular costs and annual costs TSI costs include fertilization pruning precommercial thinning For each category costs are simply listed on the appropriate page along with the year of occurrence from investment starting year zero the units of activity per acre and the cost per unit Other irregular costs may also be listed on these pages as TreeCents treats most cost categories similarly An important ta
40. ess risky one Likewise you could test a single market assumption such as the future price of timber and see if assumed changes in something we don t know much about have a big effect TreeCents is designed for rapid decision sensitivity analyses 6 0 DIFFERENCES FOR EXISTING TIMBER STANDS The existing timber stands option applies when you are starting with land plus some already established tree cover The stand doesn t have to be merchantable timber Having immature timber generates future cash flows sooner Existing trees contribute value to the forest acre value because they represent a more advanced stage of maturity closer to some eventual harvest date This type of timber investment is evaluated separately for several reasons First because the initial asset 1s different causing a different interpretation of financial criteria Second because the both local and federal tax treatment of existing forest assets is different from plantations Finally TreeCents analyzes a sequence of eight harvest entries with no automatic cycling This allows users to specify either even age or un evenage harvest patterns that can be very different in every entry TreeCents recognizes that subsequent cycles may be very different from the first so it calculates only NPV over a user designated horizon Eight entries are usually more than enough to represent a long run forestry future Forest Econ Inc 46 5 12 2003 6 1 Management data organization w
41. eveloped soil expectation valuation for timber investments in 1849 but famous economists still make errors applying his formula Timber cash flows are irregular sometimes conditional and always difficult to predict Evaluation formulas are complex arcane and they are difficult to compute much less understand Hand calculations take hours Miscalculations are easy and frequent The few computer programs that do make timber investment calculations can be limited laborious or unfriendly But you can t make profitable decisions about highly variable timber investments by ignoring the main economic influences on their financial returns 1 1 What TreeCents does for you TreeCents changes all that It makes sophisticated financial analyses easily available to private forest owners and the agency and consulting foresters who work with them You don t have to be a forest economist or an MBA Forest owners can do this at home or in the field TreeCents is a user friendly analysis assist template that organizes the necessary data for four different land use investments including new timber plantations existing timber stands whether even or uneven aged agricultural crops and grazing It is an MS EXCEL based program so it runs on most modern personal computers in both older and updated Microsoft operating systems Forest Econ Inc 4 5 12 2003 TreeCents isn t just another pretty little program TreeCents is powerful yet easy to learn
42. g with this for different log markets helps you optimize timber sales prescriptions for any single harvest or even to strategically redesign your forest production to serve your local wood market layout 3 5 2 6 Land cost page For plantations TreeCents calculates how project design redefines bare land value estimates The primary evaluation criterion is Soil Expectation Value SEV an absolute measure of project performance The highest possible SEV across plantation options can be interpreted as bare timberland value The land cost entry page not shown is a supplemental estimate of immediate bare land liquidation value The land cost entry can be set at zero or ignored without affecting SEV However TreeCents uses land cost to calibrate and normalize other relative financial criteria so they are comparable This way bare land timber project performance can be logically compared to other land use profitability This is particularly a problem in existing stands because otherwise the initial project capital includes standing timber with significantly higher liquidation values has a capital scale bias An 2 that warns you about ignoring this entry If land cost zero you get N A in comparison financial reports 3 5 3 Preplantation and planting costs Establishing a plantation takes up to two years for site preparation planting and protection of new seedlings This window figure 12 allows users to list costs of all the user specific practic
43. h Forest Econ Inc 41 5 12 2003 Net Present Value NPV is a decision criterion measures the present equivalent discounted value of all future expected net cash flows Costs and benefits are discounted to their present equivalent using a user specific rate of return for alternative investments The net residual value represents the financial value of the project and can be interpreted as the value of the initial fixed capital assets that are dedicated to the project In TreeCents NPV is calculated for the series of four eight in existing forests sequential harvests This is an implicit assumption that no costs or revenues exist beyond that point This is a practically acceptable assumption as dim future costs and revenues say out beyond 100 years would be so heavily discounted the would little effect on NPV unless they are absolute enormous Soil Expectation Value SEV is sometimes called land expectation value LEV It is a special NPV formulation used only for evaluating timber plantation regimes that start from bare land 1 e an assumption that land is initially unoccupied but will be used for timber ad infinitum TreeCents allows you four harvest entries over the rotation cycle and then assumes that the cycle repeats over and over That s why SEV should be bigger than NPV for the same project specification SEV is designed for valuing both afforestation establishing new timber plantations from different
44. hat they can keep track of all the projects that they have analyzed For example NE 40 Doug fir trial regime 6 TreeCents just reads the alpha numeric label as written and copies it to reapply it where ever necessary such as in subsequent data pages or in reports Forest Econ Inc 18 5 12 2003 W e Gut yee peet Fgm Took Qaa Wicker Hep Acrobat e De F G Projet laeti icali and Basi bromm Date DISCOUNT RATE AND SENSITIVITY ANALYSIS PATCES HARYEST COSTS TRANGPORTATION COSTS LAND COST Ain nie trikis with your mari information T you ined thi boos oe bs Treients ars th ohai clita Tha cost or revenue category E not ralavant Bava the box Hark and TreeGents assumes gara entry Default values are chown for usar traning unposes General Information Project Name Inknd West Douglas fir plantation Ima Grate Forester EJE anon Parameters Interest Discount rate m 4 aoe 65 Sensitivity analysis Inflation Rate 35E u j Tosk kerer burr s Rotation age Cycle length in paars Cost upper bound 4 10 Price Inwwer bound 5 1i Price upper beurd 35 il id start fe New EDITION 2 1 Fa Microsoft Excel TRE ay TC 2 1 manual Miera em ml ri ace Figure 8 Discount rate and sensitivity page Project evaluation parameters define the most mathematically influential variables The interest rate corresponds to alternative earnings of invested capital e g a certificate of deposit expressed as a
45. he default data If a cost o Eae oeoa is not relevant leave the box blank and TreeCents assumes a zero entry Default values are shown for Lear rri pp cals 11 13 14 15 16 18 13 EJ 23 EJ J Er l MANJA MTG i MEW COLTON 2 1 Figure 10 Harvest costs page Either enter estimated per unit costs by the five logging cost categories OR enter a total logging cost per unit estimate for each product The summary logging cost entry would include all the felling limbing bucking or a harvester skidding or forwarding sorting and loading costs Data can come from your experience or bids might be given by loggers to landowners for each sale or you can use current estimates from other sales in your vicinity DO NOT USE BOTH COST ENTRY FORMATS as double entries make TreeCents assume that your logging 1s twice as costly Fixed harvest entry costs can vary from entry to entry so TreeCents asks for these on the individual harvest entry pages Forest Econ Inc 23 5 12 2003 Logging costs can also change over time although they typically change much more slowly than log prices TreeCents automatically adjusts for inflation As in the price page users may define different 20 year trends for major cost categories These may be either increases e g caused by regulatory constraints or decreases e g more efficient technology They should be entered as an average percentage per year in excess of or below expected inflationa
46. hose files without asking you Not to worry they will be saved as you left them Click Open on the File menu Find the file TreeCents xls in the subdirectory under the one you copied the CD directory to It will usually be in a C disk directory such as C My Documents TreeCents Double click on the TreeCents program to open it The first thing you ll see is EXCEL s macro warning and query TreeCents uses VISUAL BASIC programming macros In the query box you must Enable Macros in order to proceed When TreeCents opens the initialization window figure 1 should be on your screen If the TreeCents file fails to open there is a gt 90 probability that you forgot to reset your EXCEL security from high to medium Data in TreeCents can easily be changed and saved but not to worry the program itself is protected so that it is extremely difficult to change or damage it If you do somehow corrupt the files the original from your CD can be reloaded If you find a continual fatal error in any of the program functions please report it back to the TreeCents programmers Forest Econ Inc 8 5 12 2003 Iq Edit View Insert Format Tools Data Window Help Acrobat 5 le x Ean on e E E OOO OO OOO A eae ae aes a ee 7 lt y d E N am TY Pa D y E D k aN a od Cae i v TERE CP id Sa Y m hs Se 3 7 x i j ay gt F AX c a NEJ ERN MIIN MINN anaana Saanane onan
47. indow Existing stands have very similar data requirements to plantations except there is no initial establishment Establishment cost pages are missing entirely If your project involves inter planting sparse stands those costs can be inserted into Other management costs Once again electing any practice that has volume responses or value responses to the additional effort suggests that you check for consistency between practices and your value and volume assumptions 6 2 Harvest entry volume pages There are pages for eight harvest entries as in the plantation module As in plantations these pages should be completed in order They are tied to two conditional cash flow modules where subsequent cash flows are conditional on previous specifications These include a capitalized expenses analysis and a timber cost basis depletion rate calculator Both of these are running in the background while you are entering data Harvest effects must be calculated before harvest n can be and so on On each harvest entry page first enter the harvest year not date but years since investment year zero Then enter the fixed per acre not per MBF costs and fixed revenues that may be associated with harvesting If you have a large multi acre project allocate total project fixed cash flows to a per acre equivalent Fixed revenues are not taxed as they are normally zero and a section 6 4 process needs a non taxed revenue entry Enter the volume by value and
48. is essential for financial feasibility That means that expected benefits are larger than expected costs Between projects bigger is better holding the criterion constant simply pick the project with the highest criterion value Repeated warning Projects are only comparable using absolute criteria if they start from the same initial asset and have the same time duration For example don t compare the SEV of bare ground to the NPV of an almost mature white pine stand After all investing more initial capital should generate more project value That seems obvious Duh but this error of comparison is one of the most common in forestry For RRR a value greater than the user s discount rate signifies profitability Less RRR than i means subpar performance A good EAI is positive net acre year The best is the most Another warning don t compare between unlike project with different starting assets without normalizing them User Tip In some cases absolute criteria such as NPV or SEV may indicate a different preference order than a relative criterion RRR or EAI In these cases absolute indicators are more reliable 5 4 Testing results sensitivity Good projects have positive financial criteria or gt 1 for RRR An obvious concern is how reliable is my decision Most TreeCents users like to bracket their results with a range of optimistic high and pessimistic low data assumptions TreeCents uses simple
49. it forme Cf funit i wo Wooo Wooo Starting Year Ending Year Value Maintenance Subsidy yeas yin Offa u Pe ae eee R E 2a 5 26 Ea E 30 32 EJ EY 3 Ea os oF r siart a TE 2 1 mangal MeT a MEW EDITION 2 1 Fd Microsoft Exca THE eA La wean Figure 16 Stewardship subsidy page 3 5 7 User s personal tax data Timber investment profitability rises and falls on its tax treatment and each user s tax situation is unique TreeCents calculates before tax financial criteria as well as after tax criteria so that tax effects and sometimes tax benefits are explicit Our experience is that many private forest owners are unfamiliar with the tax advantages of timber investments and pay way too much in taxes If you find yourself in this deluged demographic group log on to www timbertax org soon and self educate TreeCents will calculate the very complex and conditional financial implications of many generic tax systems including federal and state ordinary net income taxes federal and state capital gains taxes ad valorem property taxes yield and severance taxes separately or in any combination The personal tax data page entries figure 17 should be tailored to each user s individual tax profile Forest Econ Inc 33 5 12 2003 W ie ER yew peet Foma Took Qaa Winker Helo Acrobat 10 11 12 13 14 16 18 13 20 21 33 25 33 J 3 Figure 17 User s personal tax
50. l get you started but make sure you study the complete explanation before you use TreeCents criteria for any spendy investments DE Ge GR Yew foot Fome lock Qaa Wk te Ao y y o o A E eS ST a ae ES 4 PROJECT ANANCIAL SUMMARY REPORT Page 7 a Project Nara Infand Wes Oouglas fir plantation ima Grate Forester Saar T Douglas fir 420 p Afed Present Waler Eoc of E How to Interprete Financial Criteria Bose ae Up Aouad Soil Pepeckion Value Eare Lower Bomid 111 07 H Caira fl Gat Up Aouad an oy Roalisriie Rate of Kadunn 74 Soy Lower Blounnat Blea Crea Une Eeu Pquivaient Anne Imene Birr peur y Lower umd Buea Crea Upc Deud fe NEW EDITION 2 1 Ed Meresolll Excel TRE Bi TE 2 1 manual hen Figure 18 Individual project financial report The individual project financial report will probably be your most useful It gives you a spread of two absolute financial criteria and two relative ones Each criterion is Forest Econ Inc 38 5 12 2003 calculated for your best guess base case specification and bracketed by both your upper optimist and lower pessimist scenarios If you specified tax parameters the left column 1s before tax or no tax criteria and the right column is in after tax terms For most non industrial private forest owners the after tax criteria will be the most relevant The financial summary report has the same operational functions as the cost and revenue reports
51. l overhead General overhead covers all unallocated costs such as legal and accounting fees utilities etc e Other costs introduces any extra cost not previously listed Do not enter land rental costs as you are calculating land value and liquidation value for normalization was entered on the initialization window User Tip If crops are identical year to year e g haying make sure all three screens are entered identically Once all the pages are completed for all crops Continue takes you to the same report choices that you had for timber projects Now that you have entered an alternative land use project the comparative project report has meaning and can demonstrate returns for different uses side by side 7 3 Pasture land uses Pasture uses assume that a land owner is growing grass and selling grazing rights Grazing rights are sold in Animal Unit Months AUM per acre That is the amount of forage that can be consumed by an 800 pound cow and calf or the equivalent in sheep or other animal grazing TreeCents pasture calculations are similar in format to agricultural crops but simpler Pasture production is assumed to be annual not cyclic There is no rest rotation mechanism The grazing AUM production is assumed to be simultaneous in parts of each year by the animal types that you list The project initialization window is mostly labeling and setup data Notice that tax parameters are fewer as crops face only ordinary income taxes
52. l show you how to save TreeCents data sets at the end of section 3 3 3 1 2 Existing data sets If you already have your own TreeCents data sets you ll choose Use Existing Data Set If you are calling up an existing data set 1t must be in TreeCents format from a previous run and be in a subdirectory that is accessible from EXCEL TreeCents data sets have a different extension so specify all file types when you search for them When using an existing data set an intermediate window first warns you to be ready to specify an existing TreeCents data set You can back out at this stage by pressing Cancel However once you continue into the EXCEL file list figure 6 you must specify a TreeCents data set for use Forest Econ Inc 14 5 12 2003 Pressing Cancel within the EXCEL window will cause an EXCEL error message You can get out by pressing End but EXCEL will send you back to GO the TreeCents initialization window and don t collect 200 If a data file you called comes into TreeCents as computer gibberish you ve pulled up a wrong file that was not previously saved from TreeCents in the correct format F Micomel Emi TREECEMTS i 1 E eG en e Far et Ga ie e E oa JARA re AEA EOE eee ee E E Givens b Coto Set Solectlon E CHE Fenmernits LAC History Foret Eun Ire am EEN harea Polis atie 121102 poe r t Faevorkes BA obaier nckteril 12 02 a a Pty Net
53. lank TreeCents automatically adjusts log prices entries for expected price growth and inflation and stores them for later computations Forest Econ Inc 21 5 12 2003 User Tip TreeCents keeps track of inflation So enter costs for practices and revenues in today s values TreeCents automatically inflates them to your specified time of occurrence If you think costs or revenues will change at a rate more or less than inflation over the next 20 years there are several places in TreeCents where you can specify this W pe E yew peet Foma Took Qata Wik Helo Acrobat A 6 C D E G Projet lentil icali ag Basic Proma Date DISCOUNT RATE AND SENSITIVITY ANALYSIS PRICES RAREST COSTS TRANGPORTATEON COSTS LAND OoST Fee eee wath your oem information If you kerr the bows as ih Titons uae tine clout dita OP cost or revenue category 6 not relevant leawe the boo blank and Treelents assumes a zero entry Default values are shown training Purposes Cries Semio Poles Timber Species or Species Price Group Yeneer lous 4 MBF SEF ma oo Delivered lag Princes d i m m a Export fo oo oo o o Fxepart MEMBE o o 7 oo fo 6 EEE Hd HE il aE 7 3 E ii 12 13 14 15 16 18 13 20 23 25 EJ J 3 start E NEw EDITION 2 1 EJ Microsoft Excel TRE all TE 2 1 manual Mero nA EL agen Figure 9 Prices and pric
54. n annual percentage Klemperer 1996 In financial analyses it adjusts or discounts future costs and prices into present equivalents so it is called the discount rate By measuring the opportunity cost of capital tied up long term in a project it represents how much the project money would have made in a savings account or alternative investment that would have earned that rate The discount rate has exponential mathematical effects so it is the most critical economic variable in TreeCents For example a tree worth 100 in 50 years is worth 8 72 in today s equivalents at 5 and only 0 85 at 10 The discount rate is such an extremely sensitive variable we suggest users reanalyze the project several times at various rates if they have any doubt about their own appropriate rate TreeCents uses a nominal including inflation interest rate for discounting Some sources call this a guiding rate We use nominal discount rates because real discount rates inflation removed can be confusing to users and taxes are paid on nominal rather than real income You should enter your own unique current bank rate to reflect the interest Forest Econ Inc 19 5 12 2003 costs of project financial capital Use a rate that includes the right risk premium for your normal investments TreeCents also requires a general economic inflation rate entry This can be the rate reported in the business pages of your newspaper The program uses it
55. ndividual landowners to make better financial decisions Timber oriented private tree farmers are increasingly being joined by others who own rural forests for residential recreational conservation or tax purposes Non timber forest owners also manage forests and treat timber harvests as a by product TreeCents usually demonstrates that many different objectives are complementary with well chosen timber regimes For example commercial thinning can be designed to augment a wide variety of wildlife habitats while generating timber income too TreeCents should improve timber based financial decisions for most of these ownership groups The simulator does however have some specific limitations A major one 1s that it requires supplemental data from external sources that may be unfamiliar to land owners Forest Econ Inc 56 5 12 2003 This includes market and costs data as well as timber yield projections that are project specific In both cases TreeCents offers only a limited set of example default data In the future this information gap should close as land grant universities and others conduct more research and extension services make such information more readily available For now TreeCents provides an information wish list format that will help forest owners identify their information needs and improve communication with the consulting foresters that theyll work with In the mean time remember that TreeCents will run fine with less preci
56. o accord on mitigating atmospheric carbon dioxide could develop into a significant market for timber project carbon credits There are already instances where emitters subsidize new timber plantation establishment and rent the carbon credits produced until the timber is harvested As most carbon sequestration contracts are gt 40 years in duration this annual payment is mathematically treated as a revenue annuity 3 6 Automatic TreeCents project calculations Now its time to do TreeCents calculations Relax it has already been done for you automatically While you were entering data TreeCents was taking it from the templates rearranging it for the right formulas in different modules and assembling the results for your reports Your project results are ready to read 4 0 TreeCents DATA SETS AND REPORTS TreeCents has been automatically calculating summaries and results during the time you have been entering data After completing all the categories on the data organization window press Continue to find the output reporting paths These summary report files exist even before you have finished entering all categories but will be incomplete and erroneous if you enter them before you have all the project entries made This is a good place to review your project specifications for accuracy before drawing conclusions from the final investment criteria 4 1 Saving TreeCents data sets You are first asked whether you want to save your new project
57. oice window 7 1 General alternative land use analyses The remaining windows in both analyses are designed to function like the timber windows There are only a few small differences The most important is that TreeCents analyses of other land uses are designed as illustrative rather than exhaustive project analyses There are analytical shortcuts and the data resolution 1s lower If you want more detailed crop and pasture analyses most state agricultural experiment stations publish crop budgets and dedicated agricultural project financial simulators In both the alternative land use analyses the first step is to choose whether to make a New Data Set or use Existing Data Set in the same way we made timber project data sets Choose New Data Set for this tutorial 7 2 Agricultural land uses Agricultural uses imply cultivation of annual crops TreeCents asks you to define a three year crop cycle that repeats forever You may specify repetitive identical annual crops or any three year cropping pattern including rest rotation cycles The first window figure 22 pulls together a lot of the project definition labels and general data that was spread to multiple screens in the timber projects The project initialization window is Forest Econ Inc 51 5 12 2003 mostly labeling and setup data Notice that tax parameters are fewer as crops face only ordinary income taxes and bare land property taxes e F E al i li i
58. ons If you don t have this many leave them blank or enter zero Design your own species value group labels to best reflect your timber project outputs The labels carry over to other appropriate program label entries You can be creative As TreeCents computations use the entry as a multiplier you can even violate the column label units Just make sure that you are consistent in later data windows Log measure labels vary by expected product type The default case expects that the highest quality butt logs might go either to export or plywood mills There is a product category for domestic sawlogs that might sell to traditional random length sawmills Both of these log product categories are measured in MBF thousands of Scribner board feet Poles are another product category measured in MBF Small trees and some tops could go to high speed automated stud mills as tonwood small diameter logs measured in green tons Finally high defect logs of all kinds may be sold to chip mills pulp mills or biomass energy plants by the green ton Many plantations are single species but TreeCents allows for complicated mixed species stand establishment and tracking natural volunteers Enter the current reported mill delivered log values for each of the thirty product value group combinations that you intend to use figure 9 These values are often reported by state forestry agencies log reporting services or consulting firms Leave any unused cells zero or b
59. ours or more annually in tree farm activities or pass other tests of activity Be one IRS active managers with other ordinary income sources gt 90 of NIPF owners may deduct of timber expenses against ordinary income in the expense year rather than carrying them over to deduct them against future timber incomes Active managers may amortize site prep and planting costs rather than capitalize This gives a 10 investment tax credit on 95 of planting costs as well as 8 years of up front deductions against ordinary income This can create substantial tax benefits Private forest owners in high ordinary income tax brackets may be pleasantly surprised to find significant tax advantages of plantations Sometimes there are even higher after tax returns than before tax returns I ll repeat that Done correctly timber plantations can be a good tax shelter This automatic tax cross deduction feature can be turned off by zeroing out the Forest Econ Inc 35 5 12 2003 ordinary marginal federal and state income tax rate entries For other important insights into minimizing tax loads see the national timber tax web site www timbertax org 3 5 8 Carbon credit option New plantations fix carbon and mitigate industrial emissions of carbon dioxide Although the global warming treaty has not been signed by the U S Congress as of this publication date you may want to include the possibility of being paid to sequester atmospheric carbon The Kyot
60. percentage bracketing rather than statistical confidence intervals because the distribution of discrete input data variability is a guess rather than statistically valid Bracketing is really useful Most non TreeCents analysts just run a base case and just cross their fingers that reality is as good as or better than expectations TreeCents bet Forest Econ Inc 45 5 12 2003 hedging uses the pessimist results bracket If the pessimist bracket is negative or lt 1 for RRR or less than your own selection standards watch out Bad pessimist results suggest that the base case feasibility is less certain You should reexamine and potentially redesign what could be a risky project regime Too large bracket percentages always cause pessimist results to be negative or RRR lt 1 Its more useful to use smaller bracketing Bracket widths compared between projects is a useful decision guide too If two projects have the same base case results but one has wide brackets and the other is narrow the narrower project typically has more dependable outcomes so is usually preferable TreeCents makes it really easy to test individual parameters for their effect on project feasibility The discount rate has so much mathematical power that it 1s a good idea to simulate its effects on project feasibility Rerun a project several times changing just the discount rate A specified project that stays positive through some discount rate variability is usually a l
61. personal communication lt I D4ster yahoo com gt Smathers RL 1999a Feed barley 1999 North Idaho crop costs and returns estimate University of Idaho College of Agriculture EBB1 FB 99 Smathers RL 1999b Soft white winter wheat 1999 North Idaho crop costs and returns estimate University of Idaho College of Agriculture EBB1 SWW 99 Smathers RL 1999c Spring peas 1999 North Idaho crop costs and returns estimate University of Idaho College of Agriculture EBB1 SP 99 TreeCents References and Cited Literature Davis LW Johnson KN Bettinger PS Howard TE 2000 Forest management to sustain ecological economic and social values New York NY McGraw Hill Book Company 804 p Helms JA Editor 1998 The dictionary of forestry Bethesda MD The Society of American Foresters 210 p Klemperer WD 1996 Forest resource economics and finance New York NY McGraw Hill Book Company 551 p Rideout DB Hessein H 1997 Principles of forest and environmental economics Revised edition Fort Collins CO Resource and Environment Management Smith DM Larson BC Kelty MJ Ashton PM 1997 The practice of silviculture Applied forest ecology New York NY John Wiley and Sons Inc 537 p Forest Econ Inc 62 5 12 2003 TreeCents Definitions Administration costs are costs that occur over a year covering office expenses legal and accounting fees and utilities Smathers 1999a Ad valorem property tax an annual ta
62. porary deductible land improvements Examples include temporary skid trails road maintenance access gating among others As these costs often serve multiple acres remember to reallocate their magnitude down to a per acre equivalent Permanent structures are not project specific They serve your entire property over a long capital life so they should be tracked and depreciated separately in your IRS improvements account for a different tax treatment TreeCents tax treatment varies by cost category TreeCents capitalizes TSI practice costs categories as required by the IRS instead of expensing them for federal income taxes These include fertilization pruning and precommercial thinning That means their costs are carried over and deducted against the next harvest income All other costs are expensed in the year of occurrence TreeCents is unable to carry over tax losses except as deductions against ordinary income from other sources TreeCents assumes that you are an active manager as defined by IRS to enjoy this deduction If you are in doubt about your active status check www timbertax org for additional insights Forest Econ Inc 28 5 12 2003 The annual cost page 1s identical to other cost pages except it is missing the cost year entry Annual costs are assumed to occur every year at the same level Examples include fire protection district fees property taxes and administration fees TreeCents needs only number of units pe
63. program function within the disclosed set of analytical premises Neither the program authors nor Forest Econ Inc can be responsible for the success of inherently risky timber investments In the end assuring timber project profitability is the job of the owner We hope that TreeCents has helped you make accomplishing that job quicker cheaper and easier 12 0 CONTACTING THE AUTHORS The TreeCents program and manual were written by M Eugenia Camelio R M S forest economist Charles McKetta Ph D forest economist amp SAF certified forester We re at Forest Econ Inc 1150 Alturas suite 102 Moscow Idaho 83843 Phone 208 301 4634 or 208 883 3500 e mail forestecon moscow com FAX 208 882 3317 Forest Econ Inc 58 5 12 2003 We think we caught all the TreeCents program bugs from previous versions but we are continually upgrading it If you encounter anything that appears to be an analytical or process program bug 1f you have suggestions for simplifying or clarifying the process logic or user manual text or if you have data suggestions that could improve the default data set please contact us Forest Econ Inc 59 5 12 2003 APPENDIX BUFF Big Ugly Financial Formulas There is a reason that we hid these formulas from you they can be scary We ll start with the simple one NPV It is just the sum of costs discounted from their time of occurrence subtracted from the sum of discounted benefits This is the
64. r acre or 1 to represent a whole acre wide practice and the initial year cost estimate in current terms As annual costs usually rise with inflation TreeCents automatically calculates the previously entered inflation effect in both the cost series and in discounting 3 5 5 Harvest entry volumes TreeCents recognizes up to four possible harvest entries during a rotation cycle figure 14 This allows for up to two commercial thins and a regeneration harvest during a rotation cycle For plantations earlier capitalized costs are summed and deducted from the next taxable stand revenue hor SECOND HARVEST ENTRY THIRD HARVEST ENTRY FOURTH HARVEST ENTRY Enter harvest deta sequentially Please retype entries with your own information f you leave the boxes a b Travcents wets tho doh dake Tha cost on nitra category Binet niiit ied line boa blk acl Tipinis SSUMGS a 76rd entry Default values are chown for user training pumpases Ti ihis i your liek honest orairy Ue honest par msk be the soem oe pected or the project ickeritilien bier Harvest Year Fired Cost per Acre a Timber Species or Species Price Group as read ron 3 4 5 5 7 3 10 11 19 20 1 Er 34 25 25 Ezi 20 Fz ED 32 Figure 14 Typical harvest entry volume page Fill in harvest entry data pages in chronological order Some later cash flows esp taxes are conditional on previous harvests Forest Econ Inc 29 5 12 2003
65. re hunting specific project financial returns but also use TreeCents to teach you what makes various project designs turn out as winners or turkeys Forest Econ Inc 57 5 12 2003 Run a number of project variants to fine tune regimes Use TreeCents save button jump and small changes options to cut through the tedium of repetitive analyses You can t know the future perfectly Make use of TreeCents bet hedging capabilities Use a realistic pessimist optimist bracket for each project Then make multiple runs to test various regimes under a range of variable assumptions and practices to check sensitivity to assumptions and specifications Apply a rule of rationality Do the results make sense as well as cents Odd results may suggest a data entry error or heaven forbid a program error If you re not sure check your inferences and suspicions with an extension agent consulting forester or financial specialist before dedicating big bucks to a project TreeCents already makes useful data and report file on each project variant Use them to organize data represent prescriptions in long range management plans and send them back and forth to your consulting forester as a communications medium 11 0 LIMITED LIABILITY We developed TreeCents as a decision support system to help land owners understand plan and evaluate timber investments Forest Econ Inc made every effort in design and field testing to assure accurate
66. rest analyses we describe only the differences for existing forest analysis in the later sections User Tip Use TreeCents default cases to familiarize yourself with data requirements and output files The default data is from actual project examples However do not make inferences from default case results Write your own project specs over the default data to generate tailored results for your own investments 3 3 Formulating new timber plantation projects First choose Timber Uses on the project type choice window figure 4 Then select Establish a New Timber Plantation on the subsequent timber project type window figure 5 On the next window TreeCents can either define new projects with Use New Data Set or revisit adjust and reevaluate earlier analyses with Use Existing Data Set For training make your first choice Use New Data Set You will be able to see the default data entry examples and then just over write them with new project specifications that represent your own project Save your own data later 3 3 1 TreeCents data sets If you are just starting to use TreeCents you will need to build up a new data set Data sets are the organized collection of all the information that TreeCents will need to financially evaluate your timber investment TreeCents supplies the data organization for you TreeCents data templates query a user for the different types of data usually needed It uses forestry information terms cat
67. results by the real number of acres This seems like an unnecessary step but it eliminates your risk of fallaciously comparing big and small scale projects Analytical resolution is your choice Back in the days that people calculated all this long hand optimal resolution was low 1 e they didn t include many factors that affect the estimated investment outcome Typically forest owners guessed whether a project was profitable or at most compared the planting costs to one discounted potential gross harvest without considering taxes Calculators allowed more detail and intermediate cash flow effects but still owners missed the subtleties of conditional interactions particularly where taxes are concerned Now TreeCents enables you to include almost any detail and calculate the effects This is a tremendous feature but it also requires lots of data Realistically you don t have to use TreeCents full capability Sometimes small items have small effects sometimes the precision of what you know about the future isn t worth the effort to include more Find the resolution level of analysis that best fits your own needs 3 5 Timber data needs Timber projects evaluations are based on lots of different types of information There is background project information such as identification and initialization entries product and market conditions individual personal financial differences There are project initialization activities such as site pr
68. rojects financial criteria INTERPRETING Tree Lents PROJECT CRITERIA 5 1 Interpreting absolute criteria 5 2 Interpreting relative criteria 5 3 Comparing project feasibilities 5 4 Testing results sensitivity Forest Econ Inc 2 5 12 2003 6 0 7 0 8 0 9 0 10 0 11 0 12 0 Subject Look up Table continued DIFFERENCES FOR EXISTING TIMBER STANDS 6 1 management data organization 6 2 Harvest entry volumes 6 3 Land cost amp timber cost basis 6 4 NPV calculation assumptions 6 5 Conversion harvest calculations NONTIMBER INVESTMENT ALTERNATIVES 7 1 Alternative land use analyses TZ Agricultural land uses 7 3 Pasture land uses 7 4 Comparing alternative land uses COMPARE PROJECTS RANKING MODULE LIMITATIONS RECOMMENDATIONS TO USERS LIMITED LIABILITY CONTACTING THE AUTHORS Appendices Data sources References and Citations TreeCents definitions Forest Econ Inc 3 5 12 2003 Treegents USER GUIDE Inland West Edition 2 11 Forest Econ Inc 1 0 WELCOME TO Treefents Private forest owners often make large timber investment decisions about valuable forest assets on faith without taking time for financial analyses Its easy to see why Timber investment analyses are complicated Even astute consulting foresters often make large efforts to measure physical biological and ecological implications of forest management prescriptions while avoiding the pain of financial analyses Martin Faustmann d
69. ry changes TreeCents limits these trend changes to 20 years 3 5 2 5 Transportation costs page Transportation costs include log hauling delivery unloading and any extra scaling costs These are entered in a cost summary format measured in per haul mile per log unit for each of the five product types You can get estimates of these costs from log truckers or your neighbors experiences TreeCents recognizes that more owners are increasing returns by merchandizing their log products to different buyers so it allows users to test log delivery to five different spatially separated mills by product type figure 11 20 year cost trends greater or less than inflation can also be entered on this page W Ele Edd Yer reat Foma Took Qala Window Helo Acrobat A B E E F Please retype entries with your cavn infomation If you leave the bores as b TreeCents uses the defaut data If a cost o PEAT Sea is not relevant leave the box blank and TreeCents assumes a zero entry Default values are shown for Lear rri papera Type of Product Guartky m ns Cost ffun fmd 2f ynar Rate fo Change Mfynar OE ra Start pa TE 2 1 reared MiTo i NEW COLTON 2 1 FA Pirca Excel TRE Figure 11 Transportation costs page Forest Econ Inc 24 5 12 2003 Transportation costs are spatially sensitive Enter the road miles to each mill so TreeCents can internally calculate the total log delivery costs by product by destination Playin
70. se data estimates and give you good approximations of the most valuable regimes and you can always do quick sensitivity analyses to check your presumptions 10 0 RECOMMENDATIONS TO USERS We can sum up this program and manual in a few words TreeCents works It is more than just a pretty software platform It is easy to use flexible enough to represent lots of timber investments and it calculates accurate reliable and easy to interpret decision assist criteria As you use TreeCents it is worth keeping in mind the following The default data is an example only Don t rely on default findings except for training yourself about decision logic familiarity with TreeCents and a format for your own data inputs Represent your own case with your own data but don t get carried away Many small details high resolution may increase TreeCents apparent precision without affecting the real accuracy of a project decision Practice makes easy Your first run is exploratory Self training and repetition leads to significant increases in analytical speed and ease of use Think in relative terms TreeCents calculates absolute estimates of various criteria but they may not be perfectly accurate For example TreeCents tree farmer behavioral assumptions particularly about how cleverly you handle your taxes may not always hold However relative outcomes still generate valuable insights about best choices Ofcourse you a
71. shed timber stand of any age or structure Existing forest types include well established plantations or other timber stands that have been managed by either even age or uneven age selection silviculture The presence of an alarm bell warns of an extremely important input Click on it for immediate warnings or important explanations Forest Alternatives Figure 5 Timber project type window The timber project options are separated for three reasons First bare land and existing forests have different starting asset values When this is the case it is not logical Forest Econ Inc 12 5 12 2003 to compare their evaluation criteria results directly First analysts must normalizing these criteria to make them comparable Second plantations are easily standardized into fixed even age harvest and regeneration cycles while established forests particularly natural ones under uneven age management may have irregular and non uniform harvest entries over the long run Finally federal income taxes and some state taxes treat the two categories differently Plantation establishment costs are amortized and intermediate costs are either expensed or capitalized Existing forests have original cost basis computations To facilitate self instruction we wrote this manual to demonstrate new plantation analysis instructions and explanations in great detail in the following section As there are numerous similarities between new and existing fo
72. some initial conversion such as clearing occurs This makes their SEV s directly comparable with timber SEV s If you are evaluating project different uses of the exact same acre they will have the same initial market asset liquidation estimate so all relative criteria are immediately comparable and the biggest is best The problem comes in comparisons with existing timber asset criteria The same caveats discussed in timber comparisons apply Investing land plus existing stand is dedicating more initial asset capital stock to a project so there will be a scale distortion This distortion was discussed in detail in section five Forest Econ Inc 54 5 12 2003 8 0 COMPARE PROJECTS RANKING MODULE On one of the earliest path branches led to a project comparisons module that our tutorial passed by This simple routine makes comparing project variants or investment choices easy and visual once you have all the results This module is intended to make capital budget project ranking easier However remember that TreeCents works in per acre terms You will actually want to do all the acres of a higher ranked project with your available budget before moving on to lower ranked investment opportunities Your first window figure 23 asks you to define the comparison criterion This 1s a labeling function only The default uses after tax RRR because that tends to be the most useful ranking criterion Then from your previous runs enter your various proj
73. st data almost as you entered it without inflation adjustment or trending as they can be hard to interpret The data has been converted into a total cost per acre by type format rather than in per unit terms It is also reordered in a long multiple page categorical list so that you can check it easily for accuracy and completeness There will often be many blank spaces as very few projects come close to using up the specification capacity of TreeCents It is a good idea to assemble a complete project file of all reports for a particular project 4 2 2 TreeCents revenue summary report Revenues are also calculated into per acre equivalents by type Check them for accuracy and completeness Although revenues are also in a categorical list there are Forest Econ Inc 37 5 12 2003 fewer revenue categories than for costs None of the inflation or market trend adjustments are shown to keep the lists intelligible 4 2 3 TreeCents individual project financial criteria report You have a shunt window that offers you a choice between a single project report or a multiple project comparison report Pick the single project for the tutorial as the comparison report requires that TreeCents be loaded with a wide range of land use projects for the same acre You should now be looking at the individual project financial summary report figure 18 Evaluating this report s financial criteria is discussed in detail in section 5 This brief introduction wil
74. t can have substantial offsetting benefits It increases stand health concentrates stand growth on to higher quality higher valued logs and yields an early small revenue that isn t discounted away Many users thin for other reasons such as aesthetics and wildlife habitat quality Remember to coordinate your thinning activities with your harvest volume and price assumptions Forest Econ Inc 31 5 12 2003 Make sure that your yield and harvest value assumptions match the management in each project variant For example thinning and pruning stands will significantly raise log quality change volumes and increase expected log sales prices Whether this value gain offsets the higher early rotation costs is something that TreeCents will explicitly tell you User Tip Timber yield variability and its large effects on financial criteria suggests that users should invest some effort in learning to use yield simulators to better represent their forest s timber potential Options for western timber stands include 1 the USFS Forest Vegetation Simulator FVS and 2 the Arney Stand Projection System SPS 3 5 6 Annual revenues Annual revenues are those that occur at the same level every year ad finitum except as affected by inflation TreeCents recognizes two types in this category 3 5 6 1 Annual sales revenues Examples include grazing leases or floral greens contracts The annual revenues page has the same open label units an
75. t the last harvest is a clearcut whether or not it really is This artificially combines the cash value of an actual harvests with the opportunity value of the residual stand you re retaining In this manner regimes that build up forest capital are logically comparable with regimes that deplete it This is a form of green accounting 6 5 Conversion harvest calculations There are times that users may want to treat the initial timber stand as an interim stage of management You manage the existing stand volume and structure or advanced Forest Econ Inc 49 5 12 2003 regeneration to maturity Then you convert the acre to even age plantation of a more appropriate species mix Many inland western private forests are doing this with natural grand fir stands eventually replacing it with the historically and ecologically more appropriate and it doesn t hurt that it is more valuable monocultural and even aged ponderosa pine or western white pine stands Most investment simulators won t handle this midstream management style switch However in TreeCents there is an easy although not obvious adaptation First run the expected future plantation Record the SEV and set it aside Then run the existing timber stand analysis Clearcut all the volume in the entry harvest page that represents the end of your management of the existing stand Leave the other harvest pages blank In that existing stand harvest year h of the last clearcut a
76. tion window by window To rapidly revisit often used path nodes we have jump back buttons in two places The ones located in the cost entry windows send you back to the cost entry menu to speed up sequential entries into different management cost categories The other type is located in each of the project financial criteria reports They loop you back quickly from final report windows to the appropriate project start window This allows you to rapidly respecify a project after looking at a set of results The process initialization window figure 3 takes you to either a project definition process or a project comparison process New manual readers will want to define new individual projects with Start a New Analysis Experienced users with many existing finished projects to rank may want to Compare Results at a later session This manual serves primarily as a training device so we organized it to first introduce several types of timber projects and follow default example cases New users should read and follow timber project sections in order Other analytical routines such as non timber land use projects and multiple project routines are covered later Forest Econ Inc 10 5 12 2003 selection x Select the type of analysis you wish to perform a new project evaluation or a comparison New analyses are for initial project design or simulating new changes in previuos projects Comparisons require results from previous TreeCents computa
77. tions Help Back Compare Results Figure 3 Process initialization Window The project type choice window figure 4 lets you choose between two types of land use projects Timber Uses opens 2 timber templates for new plantations and existing timber stands Alternative Land Use opens agricultural crop and pasture templates selection x TreeCents calculates values or returns to different land uses on a per acre basis Please select the category of land use alternative you want to test Help Back Quit Alternative Land Use Figure 4 Project type choice window Forest Econ Inc 11 5 12 2003 3 2 Choosing timber options TreeCents has two timber investment options on the timber project type window figure 5 Establish New Timber Plantation and Evaluate Existing Forest or Established Plantation The left hand option evaluates new plantations future timber stands starting from bare land initial conditions that are typically managed under even age silvicultural regimes This analysis path will handle both 1 afforestation that puts trees into previously nonforested sites and 2 reforestation that replants previously forested sites that have been recently clearcut The right hand option evaluates existing forests i e timber stands that currently have two components including both land and an establi
78. to simplify the math of annuities Remember an 2 alarm bell warns of an extremely important input In this case the nominal interest rate already includes inflation so it has to be bigger than the inflation entry Having inflation gt nominal interest will make calculations fail The rotation age 1s simply the even age cycle length from planting to final harvest measured in years TreeCents recognizes that long run even age silviculture requires reestablishing stands after harvests so it assumes that these plantation cycles repeat indefinitely The rotation age should be the same number of years as you will enter for the timing of your last harvest entry 3 5 2 2 Sensitivity analysis Same page Sensitivity analysis is a way of second guessing economic data assumptions Any project s future economic conditions are poorly known expectations are little better than guess TreeCents allows users to account for the variability of future events by bracketing their evaluation calculations with percentage adjustments to future cost and revenue streams The pessimist bracket assumes higher future costs and lower future revenues than specified in the base case The optimist bracket assumes lower future costs and higher future revenues Our default case entry uses 10 for both costs and prices This means costs and prices may vary between 90 and 110 of their best guess value For example if establishment costs are 200 per acre in the
79. tree form or its timber quality Helms 1998 The program needs the investment year of pruning from start year zero the activity number of units per acre bids can be in per tree or per acre terms to accomplish pruning and the cost in dollars per unit If pruning is more than one lift enter successive lifts on separate lines Forest Econ Inc 27 5 12 2003 User Tip Pruning usually increases wood values by raising the grade of the first log Remember to increase your highest grade log value category accordingly in the price window Thinning removes some percentage of trees to reduce the stand density and improve the growth rate of remnant trees Helms 1998 Precommercial thinning has costs but no revenues Enter the year of thinning the activity units required to do thinning Either enter the number of trees to be thinned and a price per tree or bids for per acre enter in units thinning project and the cost per acre In commercial thinning felled trees are extracted and sold as products TreeCents treats commercial thinning as revenue generating intermediate harvest entries that are covered in harvest entry pages later User Tip Thinning reduces future harvest total volumes but should increase values of remaining trees as concentrated site growth increases their size and grade by sale date Remember to reduce harvest volumes and increase log values accordingly Infrastructure costs are expenditures made on tem
80. ts of high upfront costs and a long wait till distant piddly harvests This pattern often causes negative SEV s Excessive timber management intensity is a black hole of forestry bankruptcy a common problem on federal forests They can afford this kind of forestry you can t There are lots of forestry investments with positive SEV s that are plenty feasible Look for a few lower cost up front practices that generate higher returns sooner This will keep your silvicultural regimes lucrative 5 2 Interpreting relative criteria Relative criteria are simply measures of average project performance rates over its life rather than totals at the project beginning Rates can be in percentage terms or in units of average outcome Relative criteria can be thought of as measures of how hard the project assets are working for you There are three nice advantages of relative criteria First they can measure the extra effects of small changes in one project s design Second that they can be normalized to compare unlike projects with unlike starting assets and still give reliable answers Finally relative criteria are really useful for capital budgeting If budgets are limiting and on my tree farm the term is crippling use relative criteria to rank which hardest working projects get done first in order until the money runs out TreeCents actually has another module does this for you described in section 8 There is one drawback of relati
81. uating them as assumptions vary To help land owners compare timber to non timber land investments TreeCents can also evaluate alternative land use returns The program runs four main analysis types separately or simultaneously 1 new timber plantations either as afforestation or reforestation 2 existing timber stands whether they are established plantations even aged forests or uneven aged selection forests 3 agricultural crop alternatives such as cultivated row crops in user defined 3 year rotation cycles and 4 annual pasture use Both of the latter uses can be compared directly with timber investment returns on a per acre basis We make non timber analyses available for gross land use comparisons only The modules are generalized and don t include details found in agricultural software Forest Econ Inc 5 5 12 2003 1 2 Its still your timber investment decision We ve taken great care in designing a friendly reliable analytical program This latest upgrade of TreeCents has been debugged repeatedly and field tested However long term timber investments are inherently variable and risky so assuring the financial feasibility of projects is still a land owner s burden We have no control over project design or data selection representation and quality Most peoples expectations of future ecological managerial and market conditions are notoriously inaccurate There are places where TreeCents calculations for typical l
82. usually better to end with you haven t learned anything new Existing forest projects should always have larger NPV s because more than bare land e g land plus trees 1s being compared to just bare land There 1s another interpretation problem Existing forests are evaluated over one cycle of five harvests Plantations are evaluated for infinite cycles of with up to five harvests in each one Warning In either case absolute criteria are NOT directly comparable except between different project variants from the same starting condition You will find relative criteria quite useful for such problem incomparabilities Relative criteria ARE comparable between very different projects from different starting assets as long as the results have been normalized 1 e initial estimates of the liquidation Forest Econ Inc 40 5 12 2003 values for all the different projects have been entered in TreeCents project identification windows so that they can be used as rate adjustment factors 5 0 INTERPRETING PROJECT CRITERIA This is an important section for forest owners who are mystified or put off by the arcane theories of economics or finance We ve distilled all the theories of project evaluation into a brief and hopefully clear synopsis to make financial criteria painless and useful Here goes set your snooze alarm In making long run decisions humans typically weigh future costs and benefits as less important than immediate costs
83. ve criteria Under some odd conditions relative criteria can give different optimal project choices than absolute ones In these cases rely on the absolute criteria of course presuming that your projects are correctly specified Realizable Rate of Return RRR is a relative financial indicator used to compare project feasibilities on an average percentage rate of return basis year It is a modern Forest Econ Inc 43 5 12 2003 formulation of the internal rate of return IRR without all of IRR s analytical and interpretive problems RRR estimates the average annual rate of project earnings to its invested capital over its life An RRR higher than the discount rate is a good project because your money is working harder in the project than in the bank Among projects the highest RRR indicates the best project because your money is working harder there Negative RRR s make no mathematical sense so your report will simply show NA TreeCents calculates project RRR s to the initial land use investment capital Remember any initial land and existing timber are also forms of invested capital TreeCents is one of few investment programs can normalize for their initial values The user entered initial land or land plus timber current market liquidation values are used to make this work The initial asset value is subtracted as an opportunity cost to normalize RRR s for a projects capital investment scale Normalizing allows RRR compar
84. work m Pies Besotes Enes l a ES EA EN EG EA FA RA RA ES E Soom one om oe le AS BES BRN SRB ai Figure 6 Existing data set callup window 3 4 Designing your timber investment regime Timber investment projects even plantations can be extremely variable and take lots of data of many different types Typically timber projects are front end loaded That means that you start the process by allocating forest assets such as land and existing timber to a project and doing something to them These early allocations and expenses typically start a forest growth response that affects future harvest volumes values and project returns Growth trajectories are often redirected midstream by intermediate practices that have both real time costs and long run effects As a forest owner you should already have a good preconception of a timber project profile and be able to quantify the various elements as TreeCents entries Forest Econ Inc 15 5 12 2003 There are two scale considerations project size and analytical resolution TreeCents makes all variable size projects comparable on the same scale by working in per acre terms If your project has multiple acres as most do put in representative per acre averages There may be some large project level costs and revenues that have to be apportioned down to a per acre equivalent You can then expand results back up to project scale at the end by simply multiplying your
85. x distinction is that TreeCents automatically capitalizes TSI cost page entries Irregular costs and annual costs are expensed Forest Econ Inc 26 5 12 2003 Management Costs FERTILIZATION PRUNING PRE COMMERCIAL THINNING INFRASTRUCTURE COSTS ANNUAL COSTS OTHER MANAGEMENT COSTS Please retype entries with your own information If you leave the boxes as is TreeCents uses the default data If a cost or revenue category is not relevant leave the box blank and TreeCents assumes a zero entry Default values are shown for user training purposes Activiti Timing Amount Cost cure Year Unitsfacre unit 0 25 ay tN Oo Lower whorls Nm o Oo Up to 16 0 67 HH HH HH Figure 13 Typical management cost page Fertilization is changing the nutrient balance of an acre usually by adding nitrogen and trace minerals In the Inland West nitrogen Nz is often added to stimulate growth and potassium K is added to improve stand resilience to insects and diseases West coastal forests have also experimented with composting and adding sewage sludges to forest sites Repetitive fertilization 1s entered as successive lines User Tip If you fertilize trees should grow faster for 10 to 15 years Make sure that you use appropriate larger harvest yield assumptions that show grow these responses Pruning 1s removing live or dead branches close to the bole from a standing tree with the purpose of improving the
86. x payment levied as a percentage of the assessed property value Klemperer 1996 Aerial spray application of chemical products from the air by airplane or helicopter Animal control costs to counter possible attacks of animals on the plantation or crops Annual costs any costs e g taxes administration protection and others that occur at the same level every year as long as the plantation exists Heilman et al 1995 Assessed value is a taxable asset value to which an annual ad valorem property tax rate is applied It may be assessed locally as a market value or may be a fixed special use assessment Klemperer 1996 Base case the best guess at the most probable assumed regime conditions that you expect for a particular regime over its life Capital gain the difference between the sale price and the purchase cost of an asset held longer than one year Klemperer 1996 Carbon dioxide fixed the quantity of carbon dioxide fixed tons on one acre of forested land over a rotation cycle Commercial thinning a thinning where felled trees are extracted for useful products regardless of whether the revenues obtained for these products pay off the operational costs Smith et al 1997 Crop insurance insurance purchased to protect the crop returns against unexpected events Cultivation mechanical soil disturbance for sowing or a weed control technique without using chemical products Discount rate alternative earnings rate of

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