Question

Your friends and you decide to purchase a large tract of forest land in northern Minnesota with the intent of generating income from timber and leasing the hunting rights. Your estimated costs and returns are as follows:

• $1400/acre purchase price of land, paid back in equal yearly installments over 15 years @ 7% annual interest.

• $200/acre site preparation costs incurred immediately.

• $250/acre tree planting costs incurred 1 year after purchase.

• $100/acre forest management costs incurred 3, 4, 5, 6, and 7 years after purchase.

• $50/acre forest management costs incurred 8, 9, and 10 years after purchase.

• Annual hunting lease of $75/acre beginning in years 2 years after purchase and continuing until 15 years after purchase.

• $7/acre annual property taxes, beginning immediately and paid each year you own the land through 15 years after purchase.

• $4,500/acre income from the sale of timber 13 years after purchase.

• $1,200/acre from the sale of your forest land 16 years after purchase.

• Your discount rate is 5.5%

What is the net present value of your investment?

Answer 1

This answer can be done in excel by calculating all the cash flows, below mentioned is screenshot of excel: