- Evaluate factors that make timber an attractive potential investment, particularly in a diversified portfolio context.
- Explain political risks associated with investment in a for ign country and risk factors specific to timber.
- Develop an appropriate risk-adjusted cost of capital.
- Calculate relevant cash flows associated with the capital investment.
- Use capital budgeting methodologies to evaluate the investment and calculate equivalent annual annuities to equate alternatives with different time horizons.
- Conduct sensitivity and scenario analysis and identify key assumptions that drive results.
- What makes timber an attractive potential investment?
- What might explain why the efficient frontier shown in Figure 1 moves upward with the inclusion of timber assets in the portfolio?
- Summarize the supply and demand conditions in the global timber markets. Can you think of any future threats that potentially could affect supply and/or demand?
- Discuss the political and other risks associated with investing in Honduras. How will these risks affect the estimate of an appropriate cost of capital?
- Estimate an appropriate cost of capital to use in valuing the teak plantation investment. Please be sure to include a discussion of how you propose to adjust your cost of capital estimate for political and other risks.
- Given the many risks associated with this investment, it is difficult to accurately reflect the risk in the cost of capital estimate. What other approaches could be used to evaluate the investment and assess its risk?
- Calculate the relevant cash flows for the teak plantation investment.
- Given the project’s cash flows calculated above, compute the net present value (NPV), internal rate of return (IRR), and equivalent annual annuity (EAA) for the two proposed life cycles.
- Identify the key drivers of the NPV analysis (i.e., conduct sensitivity and scenario analysis on the key variables).
- What other qualitative factors might influence the investment decision? Would you recommend that Cambium Global Timberland invest in Beyond Forestry’s teak plantation?