FORVAL for Windows: - Forest and Wildlife Research Center
Contents
1. Shumpage Valuer la is the future value of a single sum Begin by entering the present price the annual rate of price increase and the number of years projected To use a 5 75 annual rate of increase enter 5 75 or 0 0575 in the text box After entering these val ues press the Calculate button and all information that was entered and the final answer are displayed in the text box at the bottom of the form Print the information in this text box by selecting Print from the File menu Figure 16 Figure 16 v Cumert Price 1 000 00 Projected price in year 15 2 313 16 SBIntenast Fate 5 753 FORVAL for Windows A Computer Program for FORest VALuation and Investment Analysis 13 References Bullard Steven H and Thomas J Straka 1998 Basic Concepts in Forest Valuation and Investment Analysis Copyright Bullard Straka Pr ceda Education and Training Auburn AL 270 p Bullard Steven H and Thomas A Monaghan What s the Monetary Value of Your Premerchantable Timber Forest Landowner 58 2 10 14 Straka Thomas J and Steven H Bullard 1996 Land Expectation Value Calculation in Timberland Valuation The Appraisal Journal 64 4 399 405 14 Forest and Wildlife Research Center2. At any point while FORVAL is running you may view all costs or revenues entered or make changes To view all costs or revenues that have been entered go to the menu bar and select the View option Then select View Costs or View Revenues When this choice is made you can view all previously entered costs or revenues in the large text box at the bottom of the form To make changes to a cost or revenue begin by clicking the Make Changes button on the form Another form will appear asking if you would like to change a cost or revenue Click the desired option and enter the number of the cost or revenue you would like to change After you click the OK button all the information about the cost or rev enue will appear on the form in the appropriate boxes Make the desired changes and click the Save Changes button This will save the FORVAL for Windows Figure 15 changes you made If an error occurs you must restart the process by clicking the Make Changes button The valuation technique considers all costs and rev enues explicitly including land cost You must invest in land to grow timber thus you should consider this opportunity cost when valuing a pre commercial timber stand Once all costs and revenues are entered click on Calculate The internal rate of return for a single rota tion of the stand is calculated This interest rate is used to compound all costs to the year of valuation Consider a simple example Yo
3. calculation Revenue Once the entry LO FEE RO is made select Add oy Revenue When this step is complete you should see a summary of the entry in the text box at the bot tom of the window on the left hand side Figure 8 PULL eet he sudes o 79N 20 078 wu s d un Figure 8 FORVAL for Windows A Computer Program for FORest VALuation and Investment Analysis 7 FUAVAL hor windows Liberia The fifth entry comes from the fifth row on Table 1 Harvest Revenue Once the entry is made select Add Revenue When this step is complete you should see a summary of the entry in the text box at the bottom of the window on the left hand side Figure 9 Figure 9 FUHYAL boa Windows Liberia Now choose Calculate When the Calculate button is pressed the answer and all information that has been entered are displayed in the large text box at the bottom of the form The information in this text box can be print ed by selecting Print from the File menu Figure 10 Figure 10 8 Forest and Wildlife Research Center 9 In FORVAL LEV is calcu i FORIVAL for Windows Cribenia z lated much the same way as NPV with one exception You need to select Land Expectation Value in the Type of Calculation box The previous entries are also made with the calculation of LEV However once you choose Calculate the pro gram will prompt the f a Rotation length window ee mir which states Enter the f
4. exactly the interest rate used in the calcula tion An investment is acceptable if the NPV is equal to or greater than zero In this case the invest ment earned a 4 rate of return plus 363 41 This means you have earned at least the interest rate you used in the calculation Rate of Return ROR is the interest rate earned by the invest ment ROR is the average rate of capital appreciation during the life of an investment It is also called the Internal Rate of Return IRR and the Return on Investment ROI To solve for ROR directly you would have to solve and resolve the NPV problem with various interest rates until the NPV effectively equaled zero This is time consuming but not difficult Knowledge of compound interest tells us that the interest rate used in Table 2 must be high er than 4 to reduce NPV An edu cated guess says 8 ought to be close to the interest rate that Net Present Value reduces NPV to zero Recalculating Table 2 with an 8 interest rate results in an NPV of 30 93 Thus the ROR must be higher than 8 When 9 is used to recalculate Table 2 NPV becomes 11 46 There is no formula to calculate ROR directly you must recalcu late the problem until NPV becomes zero In our exam i FORVWAL for Windows Criteria FORVAL for Windows A Computer Program for FORest VALuation and Investment Analysis 3 ple this happens at 8 71 At an 8 71 interest rate NPV is 0 23 close enough to zero
5. used to calculate the monthly or annual pay ments needed to repay a loan or accumulate a future sum in a specific time period The pre commercial timber value form calculates a value estimate of an immature stand of timber The projected stumpage price form calculates the future value of a specific stumpage price given the number of years projected and the average annual rate of price increase FORVAL for Windows A Computer Program for FORest VALuation and Investment Analysis 1 Financial Criteria From the title page choose Financial Criteria Figure 2 Once selected you will see the following window Figure 3 You are allowed to switch from one form to another during the program by going to the File menu and selecting the desired form Figure 3 When you switch to another form the cur rent form will be reset and all information will be erased Your first choice is the type of financial calculation s to make The program presents the following financial criteria The Net Present Value NPV option calculates the present value of all revenues minus the present value of all costs The Rate of Return ROR determines the interest rate that makes the net present value equal to zero This is the rate of interest actually earned on the investment In FORVAL for Windows an iterative process is used to estimate the rate of return to the nearest 0 01 This pro gram will not calculate an ROR greater than 200 The E
6. ORVAL for Windows requires these hardware and software specifications Windows 95 or later or Windows NT 3 51 or later A 3 5 disk drive 6 A mouse or other pointing device 486 or higher microprocessor VGA or higher resolution monitor 8 MB of RAM 2 1 MB of hard disk space Installation and Use To install the program insert Disk 1 into your com puter Go to the Start menu and select the Run option To begin the setup process included with FORVAL type a FORVAL1 exe This will start the self extract ing file that is on the disk The files will be copied to the temp directory on your computer When all files have been extracted insert Disk 2 and type a FOR VAL2 exe to finish file extraction After all files have been extracted from Disk 2 the FORVAL setup pro gram will install FORVAL on your computer Follow the on screen directions to complete installation and setup After setup is complete select the FORVAL option from the FORVAL folder on the Programs sec tion of the Start menu On the title page Figure 1 the user must choose one of four forms to begin calculations The choices are the financial criteria form the annual monthly payment form the pre commercial timber value form and the projected stumpage value form The financial criteria form is used to make various financial analyses such as net present value future value rate of return and other measures of financial performance The payment form is
7. ation uses the Sinking Fund formula The option to Repay a Loan determines the amount of each payment necessary to repay a loan in the stated time This calculation uses the Capital Recovery formula The details of both formulas are well described in Section 3 3 of Bullard and Straka 1998 10 Forest and Wildlife Research Center Sinking Fund Formula a z Va i Capital Recovery Formula o i 1 i For Both Formulas a annual payment i interest rate expressed as a decimal V amount to be accumulated V amount to be paid back n znumber of compounding periods years Example of a Sinking Fund Problem FUAHVAL bor windows Payments How much money would you need to set aside each year to accumulate enough money to replace a 40 000 truck in seven years Your sinking fund account will earn 5 25 annually The information needed to complete the screen is Payments to Accumulate a future sum Type of payments Annual Dollar amount 40 000 Number of years 7 Annual interest rate 5 25 Each payment will be 4 875 55 Figure 13 What if the payments were monthly Simply change type of payment to Monthly Monthly payments would be 395 07 over 84 months PUMA ehe 70799 20 78 inu 3 mi Figure 13 Example of a Capital Recovery Problem You purchase a new truck for 40 000 and take out a loan for the full amount You agree to 84 monthly payments at 5 25 inter est What is y
8. ese choices i FORVAL for Windows A Single Sum cost or revenue occurs only once during the life of an investment For example if the investment consists of a timber rotation establishment costs occur only once and thus are a single sum Note that Table 1 identifies the single sums in the prior example A Terminating Annual cost or revenue occurs annually for a set length of time during the invest ment In the prior example man agement and tax costs occurred annually until the end of the rota tion A Perpetual Annual cost or rev enue occurs annually for an infi nite period Perpetual annual costs or revenues cannot be used to calculate a future value Many calculations in forestry involve perpetual series Land expectation value is a good example This Figure 4 option might be used for the value of annual prop erty taxes in perpetuity A Perpetual Periodic cost or revenue occurs peri odically for an infinite period Perpetual periodic costs and revenues cannot be used to calculate a future value This calculation is standard for forestry Many activities in forestry occur on a reg ular perpetual basis Perhaps a timber harvest occurs every five years from part of an uneven aged forest The value of any regular non annual uniform series can be calculated via this option The first entry is the first row of information in Table 1 Establishment Cost Choose the type of cost enter the amount of
9. for our calculation as we only need ROR to two decimal places Equivalent Annual Income EAI is the annual income equivalent to a specified NPV at a specific inter est rate It is also called Annual Equivalent Equal Annual Equivalent Annual Income Equivalent and Net Annual Equivalent This criterion is often used to com pare or rank investments that are not equal in duration It is popular in forestry investment analysis for compar ing timberland investments with annual income from other land uses such as pasture rent or agricultural crops Table 2 represents a typical forestry investment over a 27 year rotation Foresters are often asked How does that compare to my option of renting the land as pasture at 20 per acre per year At 4 inter est we can calculate an equivalent annual income that will equal the NPV of Table 2 The calculation is 27 Eal Npy 004 1 04 1 04 1 27 363 41 rd z 22 25 1 04 1 At 4 interest a landowner should be indifferent between 363 41 today and 22 25 per year for 27 years The values are equivalent The Benefit Cost Ratio B C of an investment is the total present value of revenues divided by the total present value of costs An acceptable investment will have a B C ratio equal to or greater than 1 In this case the present value of revenues at least equals the present value of costs Public agencies most commonly use B C ratios In Table 2 if the sum of the three disc
10. gement amp Tax Cost Thinning Revenue Thinning Revenue Harvest Revenue 1 047 85 z 556 37 Amount 160 00 2 50 97 50 156 00 1 287 00 Formula Compounded value 461 34 117 71 1 04 1 04 1 04 1 04 1 04 150 10 189 80 1 287 00 Net Future Value 1 047 85 4 Forest and Wildlife Research Center Inputs for Financial Criteria Begin by choosing the type of calculation The choices consist of the criteria discussed above Select the type of cost or revenue to be entered Enter the interest rate the dollar amount of the cost or revenue and the year it occurs For terminating annual entries enter the beginning and ending years To use 6 as the interest rate enter 6 or 0 06 For all calculations except future value enter the year the cost revenue occurs from the beginning of the rotation not the number of years until the end of the rotation Note that you can save inputs for financial criteria to a file If you saved the inputs to a file you can then reload the information in FORVAL We recommend this step for any analysis with multiple costs and rev enues To save the input value select Save from the File menu To reload values saved to file select Open from the File menu There are four choices for individual costs and rev enues The choices are single sum terminating annual perpetual annual and perpetual peri odic All costs and revenues can be entered as one of th
11. inal Intenesk Fake AODA i year of rotation Figure DEBT ke above dala wae colodated urna the i 11 SR oker entse ITE ELT Au Rotation Length Enter the lira yaar ol platigi Figure 11 9 In the present example the final year of rotation is 27 The answer and all informa tion that has been entered are displayed in the large text box at the bottom of the form Figure 12 Print the information in this text box by selecting Print from the File menu Figure 10 t FX 1 1 i a s EE pecan abore ros af A Rotation Length 27 Figure 12 FORVAL for Windows A Computer Program for FORest VALuation and Investment Analysis 9 After calculating the answer you may change the interest rate or the type of calculation to perform You may also enter additional costs or revenues Before beginning a new problem you must press the Reset but ton After pressing the Reset button you will be asked to confirm this decision At any point while FORVAL is running you may view all costs or revenues entered or make changes To view all costs or revenues that have been entered go to the menu bar and select the View option Then select View Costs or View Revenues When you make this choice all costs or revenues that have been entered can be viewed in the large text box at the bottom of the form To make changes to a cost or revenue begin by clicking the Make Changes button on the form Another form will appear asking if y
12. is opportunity cost is 0 0729 x 400 29 16 per acre per year First we need to obtain the value of 100 spent 10 years ago using a 7 29 interest rate This is 202 11 which is obtained by calculating the future value of a Projected Stumpage Price The projected stumpage price form calculates the future value of a specific stumpage price The calcula tion is performed using the present price the number of years projected and the compound annual rate of price increase The underlying formu FORVAL for Windows single sum 100 1 0729 Second we need to calculate the value of 29 16 per year for 10 years future value of a terminating annual series This is 408 45 Adding the two compounded costs yields 610 56 The value of the compounded costs 610 56 is the value of the pre commercial timber Figure 15 Using the same interest rate all future costs and revenues could be discounted to year 10 This would again pro duce a value of 610 56 Thus this method produces a consistent value using the standard concepts of both seller s and buyer s value Bullard and Straka 1998 Note that you can save inputs for pre commercial timber valuation to a file If you save the inputs to a file you can reload the information in FORVAL We recom mend this step for any analysis with multiple costs and revenues To save the input value select Save from the File menu To load values saved to file select Open from the File menu
13. ou would like to change a cost or revenue Click the desired option and enter the number of the cost or revenue you would like to change After you click the OK button all the information about the cost or revenue will appear on the form in the appro priate boxes Make the desired changes and click the Save Changes button This will save the changes you made If an error occurs you must restart the process by clicking the Make Changes button Monthly or Annual Payments The monthly or annual payments form is used to calculate the amount of each payment either to repay a loan or to accumulate a future sum This calculation is performed using the amount to be borrowed or accu mulated the interest rate and the number of years to repay the loan or accumulate the sum Begin by choosing to accumulate a future sum or to repay a loan Then select the frequency of payments as annual or monthly After making these selections enter the dollar amount to be saved or the amount of the loan the number of years of payments and the annual inter est rate To use 6 as the interest rate enter 6 or 0 06 Then press the Calculate button Print the information in this text box by selecting Print from the File menu The option to Accumulate a Future Sum deter mines the amount of each payment necessary to accu mulate a future sum in the stated time This is an account where you make payments to yourself Interest on the account is compounded This calcul
14. ount ed revenues is divided by the sum of the two discount ed costs we obtain a B C ratio of 2 8 Land Expectation Value LEV is the value of bare land if put into perpetual forest production It is also called bare land value or soil expectation value The calculation involves compounding all costs and revenues to the end of a single rotation This com pounding includes establishment cost but it does not include land cost land value is what the user is calcu lating This net future value is assumed to occur at the end of every rotation length to form a perpetual series The value of bare land in perpetual forest production is a fundamental forest valuation calculation The data in Table 2 can be used to illustrate the calculation because land cost was not included in the problem and the 4 interest rate is a real interest rate net of inflation Table 3 shows the LEV calculation Land expectation value is 556 37 This represents the maximum amount that could be paid for the land for forestry uses if the required interest rate of 4 must be earned and if the timber values assumed are those actually expected for the property The Future Value FV criterion calculates the future value of a single sum of money For example the future value of any of the single sum amounts in Table 3 can be calculated using this criterion Table 3 Calculation of Land Expectation Value i 4 Year incurred Establishment Cost Annual Mana
15. our monthly payment The information needed to complete the screen is Payments to Repay a loan Type of payments Monthly Dollar amount 40 000 Number of years 7 Annual interest rate 5 25 Each payment will be 570 07 Figure 14 FORVAL for Windows A Computer Program for FORest VALuation and Investment Analysis 11 Pre Commercial Timber Value The pre commercial timber value form calculates the value of a tract of immature timber at the stand s current age The calculation is done by first finding the projected rate of return which must be less than 200 The inflation rate of the tract of land is calculated and finally the annual land rent is calculated The valuation method is fully presented in Bullard and Straka 1998 and Bullard and Monaghan 1999 For this calculation enter the beginning and ending land cost current age and rotation length of the timber Then enter the costs and revenues by choosing the type of cost or revenue the amount and the year the cost or revenue occurs for terminating annual entries you must also enter the ending year After entering this information press either the Add Cost or Add Revenue button When all costs and revenues have been entered press the Calculate button The estimated value rate of return and information on all costs and revenues are displayed in the text box at the bottom of the form Print the information in this text box by selecting Print from the File menu
16. quivalent Annual Income EAT is the annual sum of money that is equivalent to a projected stream of costs and revenues EAT is often used to compare or rank investments that are not equal in duration The Benefit Cost Ratio B C Ratio indicates a pro ject s return per dollar of investment B C Ratio is the present value of all revenues divided by the present value of all costs The All of the Above option calculates the Net Present Value Rate of Return Equivalent Annual Income and Benefit Cost Ratio The Land Expectation Value LEV is the value of land for perpetual forest production Straka and Bullard 1996 It is the net present value of all revenues and costs associated with growing timber on the land LEV is often called bare land value or soil expectation value Figure 2 Financial Criteria Monthly or Annual Y Vent Preccenmercial Tir Value Mississippi State MS 39762 Projected Stumaagerntice Email sbullardigcir msstate edu FORVAL for Windows Version 1 1 0 Copyright 1995 Steven H Bullard Thomas Straka and James L Carpenter Deparment of Forestry Forest and Wildlife Research Canter Mississippi State University Bax S661 The Future Value option calculates the value of a single cash flow at a future date Net Present Value NPV one of the most common criteria is also called Net Present Worth Present Net Value and Present Net Worth NPV is the discounted value of an inve
17. stment s cash flows Net implies the dis counted value of all costs is subtracted from the dis counted value of all revenues Since all cash flows are discounted an interest rate must be specified Before illustrating the use of FORVAL it is instructive to solve a small financial problem on paper Consider the example of a landowner asking you to Table 1 Cash flow from a typical forestry investment per acre Amount dollars Year Type of incurred cost revenue 160 00 2 50 Establishment Cost 0 Annual Management 1 27 amp Tax Cost Thinning Revenue 16 Thinning Revenue 22 Harvest Revenue 27 Single Sum Terminating annual Single Sum Single Sum Single Sum 97 50 156 00 1 287 00 2 Forest and Wildlife Research Center Establishment Cost Annual Management amp Taxes Thinning Revenue Thinning Revenue Harvest Revenue Table 2 Calculation of Net Present Value i 4 Amount Year Incurred 160 00 2 50 97 50 156 00 1 287 00 Formula Discounted Value 1 04 7 1 04 1 04 1 1 04 1 1 04 2 1 1 04 7 determine the NPV of regenerating 40 acres of land His alternative rate of return is 4 net of inflation and taxes The investment is outlined in Table 1 The NPV of this investment is the cumulative value of all the cash flows each discounted at 4 FORVAL does all of this for you The actual steps are in Table 2 If the NPV equaled zero the investment would earn
18. the cost and the year the cost occurs and then select Add Cost When this step is complete you should see a summary of the entry in the text box at the bottom of the window on the left hand side Figure 4 Criteria i M D k D Hi a SB ppe of geel sevens Single Sum rN ae a L L T est hate FORVAL for Windows A Computer Program for FORest VALuation and Investment Analysis 5 FUAVAL hor windows Cibena 9 The next step involves selecting the Terminating Annual option from the Type of cost revenue Figure 5 Figure 5 URVAL hor Windows Cribena The second entry is the sec ond row of Table 1 Annual Management and Tax Cost Once the entry is made select Add Cost When this step is complete you should see a summary of the entry in the text box at the bottom of the window on the left hand side Figure 6 The next step involves selecting the Single Sum option from the Type of cost revenue Figure 7 Figure 6 6 Forest and Wildlife Research Center FUAVAL hor windows Liberia 9 The third entry comes from the third row of Table 1 Thinning Revenue Once the entry is made select Add Revenue When this step is com plete you should see a summary of the entry in the text box at the bottom of the window on the left hand side Figure 7 Figure 7 FUAWAL hor windows Libera The fourth entry comes from the fourth row of i Table 1 Thinning UA Tea of
19. u need to calculate the value of a 10 year old pine plantation Originally the land was worth 400 per acre To keep the calculation simple we will assume no land appreciation Therefore at the end of the 25 year rotation land will still be worth 400 per acre Regeneration at year O costs 100 per acre and timber revenue at year 25 will be 2 500 per acre The program calculates a 7 29 rate of return and Precommercial Value The rate of melum 7 2S Beginning land value 400 BE nding land salua 400 pa The cumert age 10 pear The rotation length 25 years pal These costs ware entenad IERI Type Single Sum Amount 100 00 12 Forest and Wildlife Research Center an estimated value of timber of 610 56 Because we used a simple example the calculation can be easily illustrated First both costs occurred at year 0 land cost of 400 and regeneration cost of 100 This equates to a single cost of 500 per acre at year 0 Second both revenues occur at year 25 land sale of 400 and timber sale of 2 500 This equates to a single revenue of 2 900 per acre at year 25 We can solve for the rate of return by calculating 2 900 500 1 This rate of return is 7 29 That is a single rotation using these costs and revenues earns a 7 29 rate of return Since 400 of capital is tied up in growing the trees the land an annual opportunity cost must be calculat ed Using the rate of return as the interest rate th
20. zm FORVAL us EE for Windows Version 1 1 0 Copright 18588 Steven H Bullard Thomas Straka and James L Carpenter Department of Forestry Forast and Wildlife Research Cantar Mississippi State University Bax 81 Missiaeippi State MS 39762 Email sbullard ict msstate edu FORVAL for Windows A Computer Program for FORest VALuation and Investment Analysis Steven H Bullard Thomas J Straka James L Carpenter state edu This i un a at Mississippi State University It was edited and FORVAL Windows 113 T A per Maniliy er Annual Payment Pracommearceal Timbar Valua Fra jected Stumaage Price Figure 1 FORVAL for Windows Version 1 1 0 Copyright 155958 Stevan H Bullard Thomas J Straka and Jarnes Carpenter Department of Forestry Forest and Widife Reasearch Cantar Mississippi State Lirmeospsity Box S58 Mississippi State MS 30 67 Email shullard cfr rmestate edu Getting Started with FORVAL FORVAL FORest VALuation for Windows is a computer program for cash flow analysis of forestry investments FORVAL was written in Visual Basic and is available from the Forest and Wildlife Research Center at Mississippi State University We designed FORVAL to be used without a manual It is user friend ly and includes a Windows Help file Users enter the data requested for each box on the form and then press an appropriate button to perform the desired action F
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