Financial & economic appraisal of smallholder forest

You will perform a cost-benefit analysis (CBA) of a hypothetical forest management project in rural Massachusetts (MA). First, you will assess the potential profitability of the project from the perspective of the forest’s owners, a rural Massachusetts (MA) family,  by conducting a financial appraisal. Then, you will be asked to assess this project from the public perspective and must reorganize your spreadsheet into an economic appraisal.  The appraisals incorporate several MA state government programs to incentivize forest stewardship by private landowners.

You will submit this file along with a Word doc that answers a set of discussion questions.

To complete:

  • Read the relevant Background information below for additional context. 
  • Then complete the Financial Appraisal spreadsheet. You have to carefully read the instructions and supply the correct values or formulas in the cells corresponding to the years 2023-2038. 
  • Note that many pdfs on the assignment page are referred to in these instructions; you typically do not need to consult these to fill in your spreadsheet, but in a few cases you are instructed to look these up on the referenced pdf.
  • Answer the discussion questions in a Word document. In addressing these questions, you will also need to generate the Economic Appraisal tab of your Excel workbook.

Background scenario for financial & economic appraisals

Assume you are a rural western Massachusetts family in 2023, cash-poor but land-rich.  Your 138-acre property is mostly forestland.  You have relatively poor paying jobs and kids to feed and school, and are barely making ends meet, especially because of the high property taxes.  In addition, you want to save for college expenses and retirement.  Although you could try to sell some of your land to a developer, your family loves your forested environment for all its many benefits and services and would like to keep the property intact.

However, to keep your property, you need to cut costs of ownership and derive some income from the property.  The chatter around the general store has been increasingly focused on MA state programs under the Department of Conservation and Recreation (DCR) to help forest owners maintain their forest land if they manage them as a forest business and follow certain obligations.  In addition, you attended a public meeting sponsored by the DCR on the Working Forest Initiative and learned that there might be other ways that environmental services might be reimbursed to forest owners (e.g., FM_MA-mgmt-trees&birds_guide2020.pdf). 

Your forest has been growing up since most of it became abandoned agricultural land about 120 years ago, and much of it is now in maturing mixed hardwood forest, with lots of red oaks and some red maples and white pines, among other species.  You obtain a free assessment of your property by a service forester from the Department of Conservation and Recreation, who advises you that managing your forest for red oak timber and environmental services, such as wildlife habitat and carbon sequestration, might be a viable option.  She recommends that you hire a licensed consulting forester to help you prepare a financial appraisal of your potential forest business to see if the income you derive can keep your land in the family and avoid selling it for development.  Also, Noah and Taylor are reaching their teenage years and it would be good to give them some work in the family forest and keep them out of trouble (!!).

You and your forest consultant devise a business plan based on a review of your entire forest property from both environmental and timber management perspectives.  This is evaluated by developing a financial appraisal to examine the profitability (i.e., the net present value or NPV) of different scenarios for harvesting 6 acres of forest annually for 15 years, starting in 2024, while managing the forest as wildlife habitat. This appraisal would be compared with the current option of no timber revenue and no management costs, while paying property taxes at the commercial rate for your town.  A sufficiently positive NPV of your appraisal would suggest you should proceed with the investment in your forest business.

Evaluation of the forest property & the general business plan

Your consulting forester/environmentalist helps you construct a map of your property based on its forest values. You determine it contains:

  • 90 acres of upland forest that has lots of trees of commercial size, which could be improved and sustainably managed for timber over the long term, and offers access to timber harvesting equipment.  This forest is remarkably similar to the Lyford Forest, so you use those data for your timber harvest forecasting and financial appraisal.
  • 29 acres of rocky ridges and outcrops, with interesting plant diversity, but with forest of poor quality for timber harvest and management.
  • 17 acres of wetland, streams and seasonal swamps that are important for both watershed services and biodiversity.
  • 2 acres of houses, outbuildings, lawn and landscaped area.

The baseline scenario you develop with your consulting forester assumes the establishment of a timber harvesting business on the 90 acres of upland, well-drained forest, while taking full advantage of MA-subsidized programs.  As a good forest steward, you will also manage your forest as songbird habitat (FM_MA-mgmt-trees&birds_guide2020.pdf) and for other wildlife and biodiversity.  Therefore, you immediately submit your Forest Management Plan to the MA state Forest Stewardship Program (see example FM_forest mgmt plan-sample_Feb2020.pdf) to receive reimbursement for the development of a new forest management/stewardship plan. You submitted the state tax form by July 1, 2022 with your application to have your property classified under Chapter 61 (see FM_application 61_Feb2020.pdf).  Chapter 61 status allows you substantial annual savings in property taxes, with obligations to maintain the property as a working forest with timber harvesting (FM_MAtaxform_chap61-obligations_2015.pdf).

Baseline Financial Appraisal

Revenue projections

Red oak stumpage value, lines 8 & 10

The average timber quality of the trees in unmanaged forest is lower than expected from managed forest, but still very good in this forest.  During the first round of harvest, trees of poor bole form or with other various defects are disproportionately selected, while straight trees with good growth prospects for added future value are left behind and freed up from crown competition where necessary.  Therefore, the stumpage value—the price per 1000 bdft of standing timber -– is lower during the first harvest (over the first 15 years) compared to the second harvest.  Stumpage value is what the contracted timber harvesting company will pay to the owner.  This forest is relatively accessible for harvesting, with a high proportion of large trees of high value, so stumpage value will be higher than average.

  • The value of red oak lumber has been increasing and we expect timber prices to rise.  Your forester estimates the price paid for Red Oak will be $280 per thousand board feet in 2024.  In E8 fill in $280.  For 2025 and beyond, let’s assume a 4% annual increase in the stumpage value through 2027 so fill in this annual increase through 2027.  However, in 2027 you expect to upgrade your management plan to the DCR Forest Stewardship Council (FSC) group certification standard, so you can then sell certified timber.  Therefore, you can expect a 20% increase in price paid in 2028, so in cell I8, multiple the value in H8 by 1.2.  For 2029 and beyond, increase this new price annually by 4% again.
  • Calculate the total stumpage value in E10 by multiplying the price per 1000 board feet in E8 by the total 1000s of bdft in E7 (so, by E7/1000).  Fill across.  Note the annual bdft in line 7 has been filled by the already completed Tree Harvest table.

Stumpage value for other species (line 11)

Although our focus is on red oak management, as we conduct the first harvest there are timber trees of other species we wish to harvest.  These might be large trees that suppress the growth of red oak trees we have targeted for a second round of harvest that would start at year 16 or beyond.  Or they have some value as timber, but little value as wildlife habitat.  We will combine the variables we broke out separately for red oak into a single equation for line 11:

  • Our survey indicates that these other commercial trees we would harvest as part of our management total 3000 board feet per acre, less than half that of red oak.  For six acres, this yields 18,000 bdft.  The average stumpage is lower on this mix of species, with about $180 per thousand bdft expected in 2022.  Enter the formula into E11 that calculates this revenue from the 6 acres. 
  • For F11 and the following 13 years, we need to multiply the E11 formula by an expected increase in stumpage per 1000 bdft. (For simplicity, we will ignore any possible increases in growth of these trees.)  Let’s assume this is lower than Red Oak, at 2% annual increase for these less valuable trees in each of the 14 remaining 6-acre blocks.  Therefore, in F11, E11 is multiplied by 1.02, and so on for the other cells in the line.

Cordwood value (line 12)

You can sell as cordwood or firewood the large branchwood of harvested hardwood trees, and the small-diameter trees cut as “liberation thinning” to free high-quality small trees from competition.  Assume you harvest 3 cords/acre.  You expect to gain some value because Noah and Taylor will help generate, haul and sell this cordwood.  They will split the profit with you as their contribution to help pay property taxes.  Assume after expenses that this is sold for $100 per cord, so the annual value for the project appraisal is $50*18 cords per year.  Enter this formula in E12 and fill across, assuming no % increase in price.

Carbon payments (line 13)

You are hopeful that you might be able to aggregate your forest property with others practicing Improved Forest Management and register it with the nonprofit Climate Action Reserve.  The data from Harvard Forest indicates your own forest is sequestering carbon at a high enough rate to be attractive for carbon offset payments.

  • You expect to be able to nominate the 90 acres of forestland on your property, guaranteeing to sequester for >=15 years as required.  Although the program is not now accepting new properties, you expect to qualify after five years when the program might resume taking properties, and you have data to examine growth rates after you harvest trees. 
  • Assume the program will pay $6 per metric ton CO2e (enter in cell D41); multiply this by the total CO2e on the last line of the table (in D42). Enter this value for the fifth year of the project (2028) in cell I13, and fill across for the rest of the years.  Do not assume any increase in payments.

Property tax savings (line 14)

You will be able to pay a reduced property tax starting the year after you register the portion of your property that is forestland under Chapter 61.  The difference between the commercial rate for the town and the Chapter 61 rate is treated in the financial appraisal as a benefit, or stream of revenue.

  • For property tax relief, refer to the line item for Productive Woodland on the pdf file FM_fy2022forestlandvalues.pdf. Use the Average soil rating column as the per-acre land value.  This indicates a recommended value for fiscal year 2022 of $116/acre.
  • This should be compared to the assessed value of forestland in western MA if it were to be developed for residential or commercial use.  The property is moderately far from a midsized town and is assessed at $3000 per acre.
  • Many western MA towns tax land each year at around $15 per $1000 in value.
  • Calculate the difference in assessed value per acre ($3000-$116) and multiply this by the number of acres of the property that is forestland under forest management.  Divide by 1000 to yield the total assessed property value in thousands of dollars ($1000s) and multiply by the $15 property tax.  Enter this in cell E14, for 2024, the first year this tax savings is accrued. 
  • Assume these values remain the same over time, so fill the E14 value in each following year.

MA subsidies for forest management and stewardship (lines 15-18)

  • The Massachusetts DCR (Department of Conservation & Recreation) offers cost-share reimbursements to offset the costs of hiring a licensed consultant to complete management plans (FM_cost-share-Working Forest Initiative_2021.pdf). Find the appropriate cost-share reimbursement rates on this pdf.  Enter the proper formula on line 15 so you can receive reimbursement for your new Forest Stewardship management plan in 2023 when you submit the plan.
  • You also decide to manage your woodland as songbird habitat, and so are eligible for the subsidy that applies to your acreage as a new Forest Stewardship Plan with Bird Assessment.  This same pdf (FM_cost-share-Working Forest Initiative_2021.pdf) shows the appropriate cost-share reimbursement for a new songbird habitat assessment; enter this on line 16 for 2023.  After 10 years you will submit a renewal of your existing Chapter 61 Management Plan with Bird Assessment and be entitled to another payment; enter this on line 16 for 2033. (Note the bottom of the form indicates these reimbursements are taxable income so are sources of revenue captured in the Benefits portion of the spreadsheet.)
  • After you have implemented your Forest Stewardship Program (FSP) Plan, you are eligible to enroll in the FSC (Forest Stewardship Council) group certification program.  This green certification program (FM_green cert upgrade.pdf) allows you to sell your red oak timber in the certified market, and receive carbon payments and other benefits.  Look up the reimbursement you would receive for this upgrade from Chap 61 to the “DCR FSC Group Certification Standard” for your acreage class. You plan to obtain this after 5 years, so enter this amount on line 17 for year 2027.
  • Your intended forest stewardship plan includes procedures that qualify you for a MassWildlife Habitat Management Grant.  Liberation thinning will create forest openings, woody debris left behind provides cover for wildlife, and you expect to control invasive species.  This grant can help offset the costs of forest management.  You expect to be awarded a $10,000 grant to be spread equally at $2,000 per year for the five years 2024-2028. Enter these annual values on line 18.

Finally, use the SUM formula to add up the nine revenue streams in line 19, and fill across to the right


Chapter 61 registration/forest management plan (line 21)

Registration requires an application fee ($100) and a Forest Stewardship Plan (e.g., FM_forest mgmt plan-sample_Feb2020.pdf).  Your consulting licensed forester requires five weeks for fieldwork on your property and to compile the report (the Bird Habitat Assessment), at a total cost of $6000.  Enter these total costs in cell D21.  Note that some of this cost will be reimbursed by the funds you receive on lines 15 & 16.

Chapter 61 status has to be renewed every 10 years, along with an update to your existing Forest Stewardship Plan with Bird Assessment.  This requires less fieldwork and is estimated to cost $1500. Enter this in the proper cell on line 21.

Consulting forester fee & supplies (line 22)

Every year, your expert forester and assistant have to demarcate that year’s area to be harvested, and to mark, measure and list every tree to be harvested for timber or thinned for management.  Your forester represents you in receiving bids for harvesting and monitoring your annual total sawtimber production.  Costs include supplies for mapping and marking trees, and labor and supplies for thinning trees to improve management. Total costs are estimated at $4000 per year, starting in the first year of harvest.  Enter this value in the cell E22.  Assume an annual increase of 3% so make F22 equal to “E22*1.03” and fill across

FSC certification fees (line 23)

After three years, you will have data available to demonstrate implementation of sustainable forest management and other criteria necessary for upgrading your management plan to meet the DCR Group Certification Standard.  You need to pay your consulting licensed forester to prepare the upgraded plan ($2000) and then pay a licensed private company for an external audit of the plan and its implementation on your property ($1500).  Place this total of $3500 in the column for 2027, and then $1500 costs of field audits every three years.

Carbon payment reporting (line 24)

You plan to submit an assessment on your project’s carbon sequestration in year 2024.  This requires your consulting licensed forester to establish a set of permanent plots for monitoring net biomass increases.  However, this can utilize the same forest growth plots you are using for FSC certification, so your field costs are low.  This forestry work must start in 2024, and even with the help of some high school student assistants, is expected to cost $800 per year over the first 3 years until monitoring work lowers annual costs to $400/yr. Fill in the appropriate numbers in line 24.

Forest management costs (line 25)

Thinning trees that are projected to interfere with the future growth of timber trees, dirt road building and other maintenance activities are costly, as equipment must be rented at high fees.  Fill in these expected costs as $6000 per year from 2024-2026, then $5000 per year annually.  (Note that you will offset a proportion of these costs in the early years with the MassWildlife grant you expect to receive that you entered on line 18.)

MA sales tax on timber & cordwood sales (line 26)

You must pay sales tax of 6.25% on all your sales.  Use the Sum formula to tally lines 10-12 for each year starting 2024, and multiply by 0.0625Fill across the row.

Property management for wildlife (line 27)

Your FSC management and bird habitat assessment plans indicate you need to improve habitat for wildlife on your property, and to monitor some rare plant and animal species.  You expect to implement this as a high school science project to keep your costs down.  You need to allocate an average of $500 per year for this starting in 2026. (Note that you will offset some of these costs with the MassWildlife grant you expect to receive that you entered on line 18.)

Federal tax on revenues (line 28) (NOTE THIS FORMULA HAS BEEN FILLED IN FOR YOU)

Your net profit on timber sales (lines 10-12) is subject to a 15% long-term capital gains tax, as your forest timber qualifies as an asset you’ve held for more than a year.  To simplify, let’s assume your other revenues (lines 13-18) are also subjected to a 15% federal tax, after project costs are subtracted.  Therefore, subtract the sum of costs in lines 21-27 (total costs) from the sum of your total revenues (lines 10-18) and multiple by 0.15. Fill to right across all the project years.  If cost exceed revenues, then fill in $0 for that year.  Note that the net losses can be carried over to reduce the following year’s taxes.  This formula has been filled in for you, but you need to adjust the calculation for 2024 to reduce taxes from the net loss in 2023.

Total Costs (line 29):  Sum over lines 21-28 (formula has been entered for you).

Benefits – Costs (line 30): Enter a formula to subtract total Costs from total Benefits for each year.


Address these questions in the assignment Word. You should number each of your answers to correspond to these questions.  Limit your text to three double-spaced pages, with 12-pt Times New Roman font & 1” margins, so avoid lengthy backgrounds and introductions to the questions. Write your answers to the questions below as paragraphs in essay form, and do not bullet point them:

  1. In the baseline financial appraisal you just completed, what is net profitability of the project, as indicated by NPV in cell U30?  Before moving on, copy the NPV from U30 and “paste special” it into the yellow cell N33, so that just the value is transferred, rather than the formula (this preserves your baseline NPV while you do other manipulations below).  What are the three benefit and three cost line items that most contribute to determining net profitability?

This is your baseline financial model. Now you will start manipulating your baseline financial appraisal model to answer the questions below.

Copy this version on the tabs labeled: Economic Appraisal, Q2 Financial Appraisal, Q3 Financial Appraisal, Q4 Financial Appraisal, and Q5 Financial Appraisal so you don’t mistakenly lose the baseline model file you have saved.

  • On the Financial Appraisal Q2 The discount rate (DR) has been set at 3% in cell D4.  Explore how changes in the DR influence NPV over the range of about 1% to 10%. Give a few examples of how the DR influences the relative importance of different cost and benefit line items.
  • On the Financial Appraisal Q3 Conduct a sensitivity analysis to examine the relative importance of different variables in determining NPV, filling values into the Sensitivity Analysis table to the right of the Carbon Sequestration table.  To do this, change each of the variables bulleted below, one by one, by 20% (if an increase, multiply by 1.2) to see how much it influences NPV.  Note that you cannot just multiply an entire formula by 1.2, but only the variable you are examining.  Be sure to fill across for all the relevant years.  (verify by checking your NPV value in cell U30).  
  • Paste special the new NPV value into the appropriate cell in the column “NPV if +20%”. Then in the “% increase NPV” to the right of it, show the % increase over the baseline NPV.
  • Red oak tree density: Multiply the formula in column D of the Tree harvest table by 1.2; be sure to fill down so densities of all dbh size classes are increased by 20%.
  • Red oak stumpage value: Increase the value in E8 by 20%, and assume the same annual increase in sale price as in the baseline; the new total sales for the other years should fill automatically.
  • Carbon payment: Increase the “Value per tCO2e” in the Carbon Sequestration table by 20%; then be sure it is reflected in the stream of carbon payments over the years.
  • Property tax relief: Assume a 20% increase in the assessed value of forestland for commercial or residential use ($3000 in the baseline model).  Be careful to manipulate the formula in line 14 so only this variable is manipulated.
  • Forest management costs:  here, assume a 20% decline in the annual cost of forest management.  This cost savings should be applied to your out-of-pocket costs and not to any subsidies.

Which of the variables in this table is NPV in your financial appraisal most sensitive to?  Briefly, in a sentence, state how you might use this analysis in evaluating investing in the project?

  • In general, to what degree has the NPV of the baseline Financial Appraisal been determined by MA state subsidies (including that for property tax relief)?  Identify these by carefully examining all the instructions for filling in the appraisal and judging their quantitative impact in the baseline model.  Remove the subsidies from the Q4 financial appraisal and compare the new NPV with the baseline model. 
  • In the Financial Appraisal Q5, so you don’t mistakenly replace your finished version for submission.  Let’s explore how the stocking of timber trees has determined NPV.  Reduce the density of red oak trees by 50% across all size classes.  How does the total number of board feet change in the first year of harvest?  How does NPV change for the entire project? 
  • Finally, turn your baseline financial model into an economic appraisal, conducted from the viewpoint of a government economist examining these forest management projects from the public perspective.  Copy and paste your financial baseline appraisal into the economic appraisal sheet and then manipulate this new appraisal.  The economic appraisal involves reclassifying some revenue streams for the private investor as costs to the public, and vice versa.  Be very careful if you cut and paste line items from Costs to Benefits and vice versa.  Include in your economic appraisal only items included in the baseline financial appraisal; do not make up and add your own new environmental benefits.
  • Examine the results of your economic appraisal, after you have made the correct manipulations.  Do you think the subsidies developed by the state of MA are justifiable?
  • Looking over the spreadsheet, are there sufficient incentives to allow owners of small forest areas, and/or those with low densities of large timber trees, to profitably manage their forests?  Briefly suggest a policy that might increase the incentives for managing such forests, when they play an important role in maintaining landscape forest integrity and connectivity.  Perhaps it could be modeled on those in FM_cost-share-Working Forest Initiative_2021.pdf

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