Giddy | Costa Rica Forest Resources

Case study
Costa Rica Forest Resources

Prof. Ian Giddy, New York University

Backround and Required Return on Capital
The Cloudbridge Nature Reserve, located in the Talamanca mountain range of Costa Rica, has received a gift of $2,300. The donor has recommended that, consistent with the goals of the reserve, the money be invested for the long term in a local forestry enterprise, CRFR. This, the donor argued, would produce a substantial profit which could be used for conservation purposes in the long run. Because Cloudbridge is a nonprofit organization, the profits will not be taxed.

The Reserve's trustees must evaluate the forestry investment. They have worked out that to be worthwhile, the investment must give a rate of return of at least 13.7%. This number is based on the following calculation:

Required rate of return:
	Riskfree	5%
	Beta	0.58
	Market risk premium	5.50%
	Country risk premium	5.50%
Total from CAPM:		13.69%

Projected Cash Flows
Based on the purchase of 100 trees at $23 each, the trustees have estimated losses, harvest rates, sale prices per board-foot and costs. Their cash flow projections produce the following table:

Year	Trees harvested	Usable wood - board feet	Gross harvest proceeds	Net harvest proceeds
0	-100			$ (2,300)
1				0
2				0
3				0
4				0
5				0
6				0
7				0
8	20	436	3472	$2,774
9				0
10				0
11				0
12	20	1529	15382	$12,290
13				0
14				0
15				0
16	10	1868	23724	$18,956
17				0
18				0
19				0
20	5	1506	24151	$19,297
21				0
22				0
23				0
24				0
25	30	13937	299077	$238,962

Questions
1. What is the present value of the projected cash flows of this project?
2. What is the internal rate of return on this investment?