Tabular Representation As mentioned the end value or salvage value at rotation age can be determined easily. This can be calculated by using the species and thinning regime amongst other things to predict the volume at rotation age and the prices per log class. The Faustmann uses the interest rate at which cost value (also equal to the salvage value) is discounted taking all inflows and outflows into consideration. The Internal Rate of Return (IRR) is the interest rate that will return a Net Present Value of zero after interest has been expensed. Click to view table explanationa
Column A indicates the age of the trees. Note that trees are planted in year zero or at the end of the rotation once the clear fell operation has been completed. Column B indicates the silvicultural costs in the year that they occur, establishment in year zero, weeding in each of the first three years until close of the canopy and the cost of pruning in years 5, 7 and 9. As stated the Faustmann uses the net salvage as an input and then together with in and outflows finds an interest rate to join the salvage value and the cost of establishment. In the above example the interest rate determined the cost of establishment to be R2 800 per ha. Column C indicates the fixed costs, which could be divided into many more subheadings. The two main groups are protection and overhead costs. Column D is the summation of column B and C. Column E indicates the income from thinning in year 10 and clear felling in year 15. Column F indicates the harvesting cost of the thinning operation in year 10 and clear felling in year 15. Column G and column H indicate the capital used, this can be split into land valued at R0 per ha (included in the lease) and other capital expenditure costing R 5 059 per ha planted. The interest rate used is determined by the IRR. Column I is the interest calculated at the IRR on the progressive cost value for the previous year in column K. Column J indicates the total interest paid over the rotation. Column L indicates the net salvage value. Column M is the loss, which is column K less column L. The loss peaks at 10 years at R16 862 per ha. |
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Graphical Representation The cost and salvage values are indicated graphically below. The loss is the difference between the cost value (column K) and net salvage value (column L). The loss declines to an end value of zero at the end of the rotation. The reason for the decline in the cost and salvage value in year 15 is the income from thinning which reduces both curves. |
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