FNR 407 Forest Economics

Lab Exer. 8

2013 Woody Barton Exercise

40 points, due April 26th

Calculate a NPV and IRR for the period 1953 to 2012. Use your bequesting and non-bequestingExcel file from LE#7 but use actual purchase prices and timber sales revenue from the notesbelow from Mr. Barton.

When calculating the gain from timber sales reduce total revenue by the allowable basis (depletion allowance) using the purchase price allocated between land and timber. Your will need to track the adjusted cost basis as tracts are purchased and basis is recovered when timber is sold. Use average depletion, i.e. one adjusted basis is used for the entire ownership. Use the inventory data provided to roughly estimate the total volume of timber on the entire ownership each year.

Allow for the usual sensitivity analyses on all the fixed values: ordinary and capital gains tax rates, discount rate, annual income and expense, etc. Use 6% nominal as the base discount rate.

Non-timber benefits – include in revenues a variable that allows you to assign an annual non-timber “revenue.” Use this variable to estimate the amount of non-financial value the timberland needs to provide to the owner in order to provide an acceptable return on their investment.

Liquidation value – Calculate annual liquidation value by applying the land value allocated to each purchase to all the land owned as of the date of the purchase, i.e. the value of all the land increases based on the cost of the last land purchased. Include timber value on the entire ownership by multiplying the annual volume estimate by the price per MBF from the most recent sale.

Notes on Barton Timber sales - Volume, Dollars Gross, Type sale, Reason

1984 Area 6

100,971 BD FT, $11,313.00, Bid Sale, to upgrade area last harvested in 1939.

D & E Timber Erich Blevins

1985 Area 1, 3, 4

37,860 BD FT, $11,678.00, 50/50 Sale, Red Oak with Borer problems

D & E Blevins Erich Blevins

1988 Area 2, 5

89,337 BD FT, $9,503.60, Bid Sale, Upgrade Areas 2 & 5.

D & E Timber Erich Blevins

1990 Area 4, 5

78,876 BD FT, $14,323.35, 50/50 Sale, Wind damage (Straight Line Wind not twister)

D & E Timber Erich Blevins

1994 Area 1, 6, 4

49,854 BD FT, $21,951.08, Contract $0.12 BD FT Cut and Haul, Hot Poplar market

David Fisher Logging

1997 Area 4

108,162 BD FT, $61,746.95, Bid Sale, Over mature area, Regeneration

Davison HQS

1999 Area 1

54,636 BD FT, $85,300, Bid Sale, High Quality Sale to purchase adjoining land

Timberline International

2001 Area 6

131,109 BD FT, $70,102, Bid Sale, Management harvest

Timberland Resources, Inc.

2008 115,997bdft, $47,570, Bid Sale

2012 153,845 bdft, $51,726, Bid Sale

Memo

7/19/2009

From: Wood Barton

TO: Bill Hoover

If we are looking at cost of timber and only the land the timber is on and ignoring crop land, buildings and open areas the following would be the purchases.

Purchase price and basis allocation

1953$50059.3 acres no timber value since was logged out

in 1939

1980 $44,386 Land 249 acres+$114,756 Timber value

1999$97,643 Land 62.1 acres+$47,187 Timber value

2005$40,413 Land 29.5 acres+$21,650 Timber value

The 1953 purchase was emotion about property that had been in my family since 1863 and hope for a recreation place.

The 1980 purchase was the old home place, investment, residence and future retirement. It was contiguous to the first purchase.

The 1999 purchase was contiguous to our holdings and a defensive move to prevent another fragmentation next door.

The 2005 purchase is not contiguous to our holdings and was motivated for investment purposes. It needs to be added onto your slide 18.

The 2008 income is part from the H31 2005 purchase and part from the land purchased in 1980.

Please note that our sales cost is 10% for professional foresters. We have generally had sales of less than 150,000 board feet and fees seem to be reduced with larger sales.

If the holdings are treated as separate entities the following may help.

1953 purchase……

58.3 acres, all timber and complete harvest in about 1939.

Cost $500 in 1953

Activity was recreational and killed grape vines and hollow beech.

Taxes were nominal and enrolled in Indiana Classified Forest Program in 1963. Taxes since then have been $5 per year.

Sales gross income

1984$11,313

1995$2,218.27

2001$70,102

1980 Purchase

Total $188,888.50 Timber $47,187 Timber land $44,396

This property became our residence in 1981 and we have actively managed the property and devoted more time since my 1992 retirement.

The timber part of the property is in Indiana Classified Forest Program and total taxes are $10 per year.

1999 Purchase

Total $225,774.00 Timber $47,187 Timber Land $97,642.94

This property is adjacent to the West side of our residence land. The purchase was motivated to prevent the property from being fragmented into small holdings like we have on our East side.

The Timber part of this property is in the Indiana Classified Forest Program and the taxes are $10 year.

The timber areas were severely harvested in about 1976 for logs and pulpwood. Recovery will take time.

We have done TSI compliments of a cost share program and planted about 9 acres of abandoned creek bottom land field in hardwoods.

A Mobile home is renting a site and the small fields are being tilled by a local farmer on a share basis.

2005 purchase

Purchase cost $62,062.19, Timber cost $21,646.60, Land cost $40,412.59

This property is about 6 miles from our home and was purchased as an investment. The property is not in the Classified Forest Program and is assessed as having a building lot on it. The County taxes are about $425 per year. The property has not been enrolled in the Indiana Classified Forest Program due to my concern about the changes in the withdrawal penalties.

This property has good potential and we had the timber inventoried, conducted a bid sale and had post-harvest TSI. The sale was marked to improve the growing stock quality.

Timber Income Summary

Sales gross income

1985……………..$11,080.03

1988……………..$8,213.01

1990……………..$14,323.35

1995……………..$19,732.81

1997……………..$61,746.95

1998…………….$1,87.91

1999…………….$85,300.00

2008…………….$47,570.00

2012…………….$51,726.00

Timber Inventory Summary

Year Board Feet

1962 - 147,700

1980 - 28,690

1990 - 1,546,407

2000 - 2,029,279

2010 - 2,122,175

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