DEP : a computer program for evaluating lumber drying costs and investments

The DEP computer program is a modified discounted cash flow computer program designed for analysis of problems involving economic analysis of wood drying processes. Wood drying processes are different from other processes because of the large amounts of working capital required to finance inventories, and because of relatively large shares of costs charged to inventory insurance and tax. DEP’s flexibility allows calculation of rate of return, break-even transfer prices, or break-even facilities costs. Data input requirements are simplified into basic analytical components that are explained and illustrated with example analyses. United States Department of AgricuIture Forest Service Forest Products Laboratory1 General Technical Report FPL-37 July 1983 DEP A Computer Program for Evaluating Lumber Drying Costs and Investments STEWART HOLMES, Wood Scientist* GEORGE B. HARPOLE, Research Forester and EDWARD BILEK, Research Assistant2 Introduction Because of the time and energy required for drying lumber, drying costs are typically among the highest in wood products manufacturing. If current trends in costs of working capital and energy continue, drying costs can be expected to become an increasingly larger part of the total manufacturing cost unless more effective lumber drying practices can be identified. Analysis of such problems is a complex process requiring identification of investment and processing costs associated with the value added by lumber drying. We developed DEP (Drying Economics Program) to meet the computational needs for such analyses. In this publication we describe the use of the DEP computer program and offer examples of analyses. Program DEP, written in Fortran for use on UNIVAC 1108 and 1110 systems (appendix C), is basically a discounted cash flow model. It differs from other discounted cash flow computer programs because of the explicit computational requirements of drying projects to provide for large and variable amounts of working capital investment in lumber inventories, associated operating costs in inventory insurance and taxes, and because of the energy-intensive characteristics of drying processes. 1 Maintained at Madison, Wis., in cooperation with the University of Wisconsin. 2Stewart Holmes is currently a hardwood mill manager In Paraguay for Nesalar S.A.I., Foz do Iguacu, Brazil. Edward Bilek Is a Research Assistant, Department of Forestry, University of Minnesota, St. Paul. In general, DEP is designed to compute the after-tax time value of investment capital, operating costs, and revenue cash flows in terms of four principal types of investment criteria: (1) present value of the investment, (2) rate of return on investment (table 1), (3) total unit cost(s) of production including taxes and profit (table 2), and (4) maximum investment(s) that can be made to obtain a minimally attractive rate of return (table 3). The present value of the investment (PVI) is defined by the discount rate used. PVI is the present value, or net present worth, of the stream of annual net cash flows discounted by the discount rate. If the discount rate is the same as the rate of return that could be realized from alternative investments with similar risk (the opportunity cost of money capital), PVI may be used as a basis for comparing alternative investment opportunities. Rate-of-return (ROR) criteria for DEP are of two types. Internal ROR is the particular rate of interest required to discount the stream of annual net cash flows to a present value of zero (tables 1 and 2). For complex investment projects where there may be more than one Internal ROR, DEP will compute only the internal ROR closest to the discount rate used. The second type of ROR is a composite that expresses the ROR-to-equity capital invested at the initiation of a project (table 3). This is referred to as a composite because it is computed as an ROR-to-equity capital as a composite of the rate of interest specified for monies that may be borrowed to finance the project and the rate of interest specified for reinvested cash surpluses. The total unit cost of production (cost per dry unit of lumber processed) is the price-volume-cost break-even unit product price(s) required to yield an after-tax profit consistent with either the internal or composite ROR. The break-even Ta bl e 1. –D E P o ut pu t of c as h flo w s an d as so ci at ed i nt er na l ra te s of r et ur n A IR -D R Y IN G FA C IL IT IE S *A D D 10 A C R E S (IN V E S TM E N T TA X C R E D IT O F $ 12 00 0. C O N S ID E R E D .) IN IT IA L IN V E S TM E N T-Y E A R 0 E FF E C TI V E TA X R A TE .5 26 8 O R IG IN A L C A S H E Q U IT Y $ 0. V .C ./T O T TR A N R E V = .6 32 0 FA C IL IT IE S C O S T $ 13 27 00 0. B O R R O W IN G R A TE .0 00 0 E N D IN G V A LU E O F E Q U IT Y $3 97 34 95 6. F. C ./T O T TR A N R E V = .0 04 0