**What are IRR, NPV and PV?**

- IRR = Internal Rate of Return
- Provides a percent rate of return
- If I invest $10,000 (or $10,000,000) replanting this stand, what rate of return will I get? What will I earn on the money I invest?

- NPV = Net Present Value
- Provides a dollar amount
- You have to pick a discount rate (or rate of return)
- If I invest $10,000 (or $10,000,000) fertilizing this stand and I want to earn 5% on that investment, what is the present value of all the costs and revenues I will incur/receive in the future?
- Note: the IRR is the discount rate at which the NPV goes to $0.00
- That may sound bad, but as long as the NPV is $0 or positive, you are getting back all the money you invested and you are earning returns at the discount rate

- PV = Present Value
- Provides a dollar amount that does not include the cost of the investment
- If I want to earn 6% on my investment in a timberland property, how much can I pay for it?

**Which is the best measure to use to rank projects? **

- Quick answer: both IRR and NPV—they usually provide the same answer.
- What happens if they disagree?
- If the goal is to maximize your wealth, the NPV is better because it tells you just how much your wealth will increase.
- A common example considered a low NPV and a high IRR, vs a high NPV and a low IRR

Assume there is $50,000 to invest and there are two projects from which to choose.- Project A involves an investment with an NPV of $1,000 and has an IRR of 9%.
- Project B involves an investment with an NPV of $55,000 and has an IRR of 7%.

- Note: Under the right conditions, the IRR calculation process can produce
multiple answers.
- I haven’t seen it happen, but is supposed to occur when the cash flows switch back and forth from negative to positive several times over the life of the investment.

**How does the PV (present value) work? **

- The Present Value is the discounted value of all the future cash flows.
- When appraisers run discounted cash flow models to determine the value of a timberland property, they are really calculating the Present Value, not the Net Present Value.
- When people talk about the net present value of a property, they often really mean the present value.

- You fill your DCF model (can use a spreadsheet) with all the costs and revenues
you expect for the next few years and calculate some sort of end value (perpetual
cash flow or property sale) and put in a discount rate.
- But don’t put in a purchase price.
- The DCF model will calculate a value
- That value is what you can pay for that property using that discount rate.
- Suppose you use a 6% discount rate and the model spits out a number of $1,500/acre
- This means you can pay up to $1,500/acre and make a 6% return.
- If the market price is higher, it means that—if you pay the higher price—you will make less than 6% on your investment.