Presentation outline (12/7/2010) Concept of Land Expectation Value Derivation of formula LEV calculation of timberland Calculation of Net Future Value Calculation of LEV for un-even aged forest

Land Expectation Value (LEV) The value of land is an attribute to the use to which it is put and, therefore, must be calculated from the value of output of forest products or other crops which can be grown on it. Soil rent or land/soil expectation value is the present net worth of a permanent periodic net income.

PNW LEV = PNW infinity---(1) (1+i) R (1+i) 2R Multiplying both sides of (1) by 1 / (1+i) R, we get: LEV (1/ (1+i) R ) = PNW / (1+i) R + PNW / (1+i) 2R + PNW / (1+i) 3R +…(2) Subtracting equation (2) from (1): LEV (1- 1/(1+i) R ) = PNW Or, LEV = PNW (1+i) R / (1+i) R – 1 Substituting PNW, we get:

Faustmann’s Formula

LEV calculation in Timberland Valuation (Straka and Bullard, n.d.) LEV simply calculates the value of bare land in perpetual timber production. It is based on the standard discounting formula for the present value of a perpetual periodic annuity: a PV = (a) (1+i) t - 1

Where, PV = Present value of a perpetual periodic annuity a= Value received every t years in perpetuity t=Year between annuity payments i=Interest rate, expressed as a decimal

Calculation of net future value

LEV = = $ (1+i) t - 1 LEV represents the maximum amount that could be paid for a tract of land and still earn the required interest rate. A buyer could pay $ per acre for the tract and earn 4% on the investment, assuming that the land is used to grow timber according to the management schedule outlined.

Valuing uneven-aged timer stand using LEV criterion The standard equation is : LEV = a / i where a = Net annual income generated and i = interest rate expressed as decimal. Consider a 1000 acre tract of timber that produces 1500 cords of pulpwood annually. Pulpwood is worth $35 per cord, so annual revenue is $ The tract costs $3000 annually to manage and property taxes are $1.50 per acre per year. Annual costs, then, are $ 4500 and net annual revenue $ Using 4% discount rate, the LEV of this tract is: LEV = $48000/0.04 = $ or $1200 per acre

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