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Tree Values Assignment

This document is a case study analyzing the value of trees on Mr. Smith's forested land. It provides background on the land and discusses factors that influence tree value, such as diameter, quality, and market prices. It also presents estimates of trees per acre and their grades. The document analyzes two situations: 1) cutting all 12-14" diameter trees now, or 2) thinning some trees and allowing continued growth for 5 years before larger cuts. Calculations show greater long-term profit from thinning and delayed harvesting as trees increase in grade and value over time. The best option for Mr. Smith is to cut less desired trees now and thin the forest for increased future yields.

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2K views

Tree Values Assignment

This document is a case study analyzing the value of trees on Mr. Smith's forested land. It provides background on the land and discusses factors that influence tree value, such as diameter, quality, and market prices. It also presents estimates of trees per acre and their grades. The document analyzes two situations: 1) cutting all 12-14" diameter trees now, or 2) thinning some trees and allowing continued growth for 5 years before larger cuts. Calculations show greater long-term profit from thinning and delayed harvesting as trees increase in grade and value over time. The best option for Mr. Smith is to cut less desired trees now and thin the forest for increased future yields.

Uploaded by

ssecnirpamlas
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Project Assignment

AFM

Topic:

Case Study:
(Tree Value)

Submitted To,

Sir M.Akbar Khan

Submitted By,

Waseem Ali
01-120091-082
MBA 3 ‘B’

Dated: 27-08-2010

Bahria University Islamabad

1
Tree Values
Introduction:
Mr. Smith was a person who owns a forest land which was inherited by his father.
He was only interested for his land to be is his asset, beside that he checked on prices of
land in that area. The value of his land was increased by some of the trees that were high
quality timber. Ms Bennett was a specialist who helps him in suggesting and to make
decision whether to cut the trees presently of not.

Logger was interested in timber and proposed Mr. Smith to cutting the trees that
were 12” DBH. As timber was a high volume business the prices for standing timber
were in dollar per thousand MBF.

Value of trees depends on (i) Usable timber (ii) trees Quality / grade. The trees
which were above 12” DBH and 60 Board feet were consider good and value worth, but
below 12” the wood was not of commercial value.

Trees growing rate in the New England was:

Good quality hardwood grows 2” in diameter in 10 years .


Inferior quality grows ½” in diameter in 10 years.

Further tree value also depended on Increase in timber prices i.e. Price increased over last
20 years steadily and likely to continue. Currently increasing 1-3% above rate of
inflation. There were 300 trees per acre on property.

Ms. Bennett’s Estimates:


In 40 acres of land there were about 60 crops tree per acres. Which were
evenly divided into 12” and 14”. There were mostly grade 4 trees according to size &
conditions.

Ms. Bennett’s Suggestions:


(i) He should consider thinning cutting about half of the 12” and 14”
trees. This will allow to grow 1” in diameter in 5 years.

Situations for Cutting Trees:

1- Cutting the trees that were 12” DBH


2- Leave the unwanted crops to grow in future and cut the less desired trees.

2
Data for valuing tree with respect to forest industry:

1- CAPM
2- NPV
3- Rate of inflation
4- Growth rate

Formula:
Rf = 7.10
Rm = 6.20
B = 0.85

CAPM: R j = Rf + b ( Rm - Rf )

Rj = 6. 47%

Total area of the forest land 40 acres


Combine total of tree 60
Includes 12” DBH 30
Includes 14” DBH 30

Grades for the trees with respect to 12” and 14” is grade “4”

The probability of growing trees according to grade is

Tree grade 4 to 3

Trees unthinned, unmanaged forest land 60%


Trees thinned, managed forestland 80%

Ms. Bennett’s Suggestions:

Thinning cutting about half of the 12” and 14” trees. This will allow to grow 1” in
diameter in 5 years.

3
The average hardwood prices by tree grades are:

Tree grade $MBF

4 40
3 120
2 260
1 445
Veneer 845

Now we will consider according to the knowledge which I have gathered by going
through this case analysis there are two situations for cutting trees as mentioned
above which was suggested by Ms. Bennett i.e.

1-Cutting the trees that were 12” DBH


2-Leave the unwanted crops to grow in future and cut the less desired trees.

Now we will consider the above two suggested situations and see which one is
desirable and valuable for maximization profit by cutting trees.

4
Conclusion:

Mr. smith now can easily determine that what value he will get in future by cutting trees
of 12” & 14” DBH. On our calculation it can clearly be seen that if Mr. smith allows
logger to cut all the trees of 12” and 14” presently then he will get $18.2 million. But if
he let them grow and thinning done properly and managing them after 5 years the trees
will go to increase their grade with greater productivity and handsome amount. So the
best option for Mr. smith is to cut the trees after 5 years and for now use the unmanaged,
unthinned wood and sale them for the use of fire purpose.

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