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United States Department of Agriculture
Forest Service
Forest Products Laboratory
General Technical Report FPL-37
DEP A Computer Program for Evaluating Lumber Drying Costs and Investments
Abstract 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
Tabl
e 1.
–DE
P o
utpu
t of
cas
h flo
ws
and
asso
ciat
ed i
nter
nal
rate
s of
ret
urn
AIR
-DR
YIN
G
FAC
ILIT
IES
*AD
D
10
AC
RE
S
(INV
ES
TME
NT
TAX
CR
ED
IT O
F $
1200
0. C
ON
SID
ER
ED
.)
INIT
IAL
INV
ES
TME
NT-
-YE
AR
0
EFF
EC
TIV
E
TAX
R
ATE
.5
268
OR
IGIN
AL
CA
SH
E
QU
ITY
$
0.
V.C
./TO
T TR
AN
RE
V=
.632
0 FA
CIL
ITIE
S
CO
ST
$ 13
2700
0.
BO
RR
OW
ING
RA
TE
.000
0 E
ND
ING
V
ALU
E
OF
EQ
UIT
Y
$397
3495
6.
F.C
./TO
T TR
AN
R
EV
= .0
040
= .0
039
FAC
ILIT
IES
S
ALV
AG
E
VA
LUE
$
7556
00.
DE
PR
./T.T
.R.
WO
RK
ING
CA
PIT
AL
$ 99
6443
8.
RE
INV
ES
TME
NT
RA
TE
.000
0 TO
TAL
INV
ES
T.
$112
9143
7.
INTE
RN
AL
RO
R
.263
0 P
.V.
OF
INV
ES
T.(I=
.150
0)
$ 80
4161
4.
TAX
C
OS
TS/T
.T.R
. =
.189
7 A
.T.
PR
OFI
T/T.
R.
= .1
705
FIN
AN
CIA
L S
UM
MA
RY
YE
AR
9
YE
AR
10
YE
AR
8
YE
AR
-EN
D V
ALU
ES
.
. .
YE
AR
1
YE
AR
2
YE
AR
3
YE
AR
4
YE
AR
5
YE
AR
6
YE
AR
7
YA
RD
TH
RU
PU
T 45
000.
45
000.
45
000.
45
000.
45
000.
45
000.
45
000.
45
000.
45
000.
45
000.
TR
AN
S.
PR
ICE
/UN
IT
$ 3
75
.00
$
40
1.0
0 $
42
9.00
$
459.
00
$ 49
2.00
$
526.
00
$ 56
3.00
$
602.
00
$ 64
4.00
$
689.
00
TOT
TRA
N R
EV
EN
UE
S 1
6874
999.
$
1804
4999
. $ 1
9304
998.
$ 2
06
54
99
8.
$ 2
21
39
99
9.$
236
6999
8.
$ 25
3349
98 . $
2708
9998
. $
2897
9998
. $
3100
4998
.
INTE
RE
ST
INC
-EX
P
0.
0.
0.
0.
0.
0.
0.
0.
0.
0.
MA
T. &
HA
ND
L. C
OS
T $
10
11
37
04
.$
10
82
14
88
.$
11
57
91
27
.$
12
39
98
91
.$
13
25
70
48
.$ 1
01
85
09
5.$
15
17
81
17
.$
16
24
02
01
.$
17
37
10
68
.$
18
59
36
22
. IN
V.
T4X
&
IN
SU
R.
1480
85.
1544
8.
1695
42.
1814
13.
1941
10.
2076
98.
2222
38.
2377
89.
2544
35.
2722
48.
LAB
OR
CO
ST
4005
70.
4286
10.
4586
13.
4907
15.
5250
66.
5618
20.
6011
48.
6432
28.
6882
54.
7360
32.
TOTA
L V
AR
CO
ST
$ 10
6623
59.$
11
4085
46.$
12
2072
81.$
13
0620
18.$
13
9762
24.$
14
9546
13.$
16
0015
02.$
17
1212
18.$
18
3197
56.$
19
6023
01.
UN
IT V
aR C
OS
T $
23
6.9
4 $
2
53
.52
$
27
1.2
7 $
2
90
.27
$
31
0.5
8 $
3
32
.32
$
35
5.5
9 $
3
80
.47
$
40
7.1
1 $
4
35
.61
PR
OFI
T C
ON
TRIB
. $
62
12
63
9.$
6
63
60
52
.$
70
97
71
7.$
1
59
29
80
.$
81
63
77
5.$
8
71
53
86
.$
93
33
49
6.$
9
96
87
80
.$
10
66
02
42
.$
11
40
26
97
.
FIX
ED
MFG
CO
ST
$ 1
80
.$
19
3.$
2
06
.$
22
1.$
2
36
.$
25
2.$
2
70
.$
28
9.$
3
09
.$
33
1 .
TOTA
L F.
C.
$ 6
10
00
.$
71
69
0.$
7
67
06
.$
82
07
8.$
8
78
23
.$
93
97
1.$
1
00
54
9.$
1
07
58
7.$
1
15
11
8.$
1
23
17
7.
OV
ER
HE
AD
CO
ST
66
82
0.
71
49
7.
76
50
2.
81
85
7.
87
58
7.
93
71
9.
10
02
79
. 1
07
29
8.
11
48
09
. 1
22
84
6.
FAC
ILIT
IES
C
OS
T $
0.$
0
.$
0.$
0
.$
14
78
00
.$
0.$
0
.$
0.$
1
93
88
0.$
-7
55
66
0.
WO
RK
ING
CA
PIT
AL
69
73
45
. 7
46
45
2.
79
87
88
. 8
54
36
5.
91
43
47
. 9
78
36
3.
10
46
42
4.
11
20
08
6.
11
98
59
3.
-18
31
92
02
. IN
VE
ST
ME
NT
$
69
73
05
.$
74
64
52
.$
79
81
88
.$
85
43
65
.$
10
62
14
7.$
9
78
36
3.$
1
04
64
24
. $
1
12
00
86
.$
13
92
47
3.
$-1
90
74
80
2.
SE
NS
ITIV
ITY
A
NA
LYS
IS
INTE
RN
AL
RA
TES
OF
RE
TUR
N A
T A
DJU
STE
D I
NP
UT
VA
LUE
S
80 P
CT
90 P
CT
100
PC
T 11
0 P
CT
120
PC
T TR
AN
S.
PR
ICE
/UN
IT
.250
.2
57
.263
.2
69
.273
Y
AR
D T
HR
UP
UT
.119
.1
91
.263
.3
35
.407
TOTA
L F.
C.
.264
.2
69
.263
.2
63
.263
U
NIT
VA
R C
OS
T .4
31
. 33
9 .2
63
.200
.1
46
FAC
ILIT
IES
C
OS
T -2
69
. 26
6 .2
63
.261
.2
58
DE
PR
EC
IATI
ON
$
8
39
50
.$
83
95
0.$
8
39
50
.$
83
95
0.$
9
24
70
.$
92
47
0.$
9
24
70
.$
92
47
0.$
1
03
70
0.$
1
03
70
0.
AFT
ER
TA
X P
RO
FIT
$
28
80
39
2.$
3
06
67
21
.$
32
82
61
6.$
3
51
44
34
.$
37
77
78
4.$
4
03
58
97
.$
43
25
27
4.$
4
62
25
60
.$
49
40
88
2.$
5
28
83
98
. A
.T.
EA
RN
ING
S
29
64
34
1.
31
50
67
1.
33
66
56
6.
35
98
38
4.
38
70
25
4.
41
28
36
7.
44
17
74
4.
47
15
03
0.
50
44
58
2.
53
92
09
8.
A.T
. N
ET
CA
SH
FLO
W
22
66
99
6.
24
04
21
9.
25
67
77
9.
27
44
01
9.
28
08
10
7.
31
50
00
3.
33
71
31
9.
35
94
94
4.
36
52
10
8.
24
46
69
00
.
AC
UM
NE
T C
AS
H F
LOW
$
-9
24
.4M
$ -
66
20
.2M
$ -
40
52
.4M
$ -
13
08
.4M
$
14
99
.7M
$
4
64
9.7
M
$
80
21
.0M
$ 1
16
15
.9M
$ 1
52
68
.1M
$ 3
97
35
.0M
TabL
E 2
.–D
EP
out
put
of c
ost
cash
flo
ws
and
com
pute
d re
venu
es r
equi
red
to r
ealiz
e a
15 p
erce
nt a
fter
-tax
inte
rnal
rat
e of
ret
urn
AIR-
DR
YIN
G
FAC
ILIT
IES
*AD
D
10
AC
RE
S
(INV
ES
TME
NT
TAX
C
RE
DIT
O
F $
1200
0.
CO
NS
IDE
RE
D.)
INIT
IAL
INV
ES
TME
NT -
-Y
EA
R
0 E
FFE
CTI
VE
TA
X
RA
TE
.52
68
O
RIG
INA
L C
AS
H
EQ
UIT
Y
$ 0.
V
.C./T
OT
TRA
N
RE
V=
.74
96
FA
CIL
ITIE
S
CO
ST
$ 1
32
70
00
. B
OR
RO
WIN
G
RA
TE
.00
00
E
ND
ING
V
ALU
E
OF
EQ
UIT
Y
$2
24
33
60
4.
F.C
./TQ
T TR
AN
R
EV
= .0
04
7
WO
RK
ING
C
AP
ITA
L $
99
64
93
7.
RE
INV
ES
TME
NT
RA
TE
.00
00
FA
CIL
ITIE
S
SA
LVA
GE
V
ALU
E
$ 7
55
60
0.
DE
PR
./T.T
.R.
= .0
04
6
TOTA
L IN
VE
ST.
$
11
29
14
31
. IN
TER
NA
L R
OR
.1
50
0
P.V
. O
F IN
VE
ST.
(I.15
00)
$ -0
. TA
X
CO
STS
/T.T
.R.
= .1
26
9
A.T
. P
RO
FIT/
T.R
. =
.11
41
OP
ER
ATI
NG
C
AS
H
FLO
WS
W
HE
RE
C
OS
TS
= R
EV
EN
UE
S
YE
AR-
EN
D V
ALU
ES
.
. .
YE
AR
1
YE
AR
2
YE
AR
3
YE
AR
4
YE
AR
5
YE
AR
6
YE
AR
7
YE
AR
8
YE
AR
9
YE
AR
10
TRA
NS
. P
RIC
E/U
NIT
$
31
6.1
8
$
33
8.1
0
$
36
1.7
1
$
38
7.6
0
$
41
4.8
3
$
44
3.5
0 $
4
74
.69
$
5
07
.57
$
5
42
.99
$
58
0.9
3
YA
RD
TH
RU
PU
T 4
50
00
. 4
50
00
. 4
50
00
. 4
50
00
. 4
50
00
. 4
50
00
. 4
50
00
. 4
50
00
. 4
50
00
. 4
50
00
.
TOT
TRA
N
RE
VE
NU
E$
14
22
81
03
. $
15
21
45
85
. $
1
62
76
95
0.
$ 1
74
15
19
8.$
1
86
67
27
1. $
1
99
57
28
6. $
2
13
61
12
5.
$ 2
28
40
84
8. $
2
44
34
39
6.$
2
61
41
76
8.
INTE
RE
ST
INC-
EX
P
0.
0.
0.
0.
0.
0.
0.
0.
0.
0.
HA
T.
&
HA
ND
L.
CO
ST
$ 1
01
13
70
4.
$ 1
08
21
08
8.
$ 1
15
79
12
7.
$ 1
23
89
69
0.$
1
32
57
04
8.
$
14
18
50
94
. $
1
51
78
11
6.
$
16
24
02
01
.$
17
37
70
67
. $
10
59
36
22
.
LAB
OR
C
OS
T 4
00
57
0.
42
86
10
. 4
58
61
3.
09
07
15
. 5
25
06
6.
56
18
20
. 6
01
14
8.
60
32
28
. 6
88
25
4.
73
64
32
. TO
TAL
VA
R
CO
ST
$ 1
06
62
35
9.
$
11
40
85
46
. $
12
20
72
81
. $
13
06
20
18
. $
13
97
62
24
.$
14
95
46
12
. $
16
00
15
02
. $
17
12
12
18
. $
1
83
19
75
6.$
1
96
02
30
1.
INV
. TA
X
&
INS
UR
. 1
48
08
5.
15
84
48
. 1
69
54
2.
18
14
13
. 1
90
11
0.
20
76
98
. 2
22
23
8.
23
77
89
. 2
54
43
5.
27
22
48
.
UN
IT
VA
R
CO
ST
$ 2
36
.94
$
2
53
.52
$
2
71
.27
$
2
90
.27
$
3
10
.58
$
33
2.3
2 $
3
55
.59
$
38
0.4
7
$
40
7.1
1 $
4
35
.61
PR
OFI
T C
OM
TRIB
. $
35
65
74
4.$
3
80
60
39
.$
40
69
66
9.$
4
35
31
80
.$
46
91
04
8.$
5
00
26
73
.$
53
59
62
3.$
5
71
96
30
.$
61
14
64
0.$
6
53
90
77
.
FIX
ED
M
FG
CO
ST
$ 1
80
.$
19
3.$
2
06
.$
22
1.$
2
36
.$
25
2.
$
27
0.$
2
89
.$
30
9.$
3
31
. O
VE
RH
EA
D
CO
ST
66
62
0.
71
49
7.
76
50
2.
81
85
7.
87
58
7.
93
71
9.
10
02
79
. 1
07
29
8.
11
08
09
. 1
22
80
6.
TO
TA
L
F.C
. $
6
70
00
.$
71
69
0.$
7
67
08
.$
82
07
8.$
8
78
23
.$
93
97
1.$
1
00
54
9.$
1
07
58
7.$
1
15
11
8.$
1
23
17
7.
FAC
ILIT
IES
C
OS
T $
0
.$
0.$
0
.$
0.$
1
47
80
0.$
0
.$
0.$
0
.$
19
38
80
.$
-75
56
00
. W
OR
KIN
G
CA
PIT
AL
69
73
45
. 7
06
45
2.
79
87
07
. 8
54
36
5.
91
03
07
. 9
78
36
3.
10
46
02
4.
11
20
08
6.
11
98
59
3.
-18
31
92
02
. IN
VE
STM
EN
T $
6
97
30
5.$
7
44
95
2.$
7
98
78
7.$
8
59
36
5.$
1
06
21
47
.$
97
83
63
.5
10
46
42
4.$
1
12
00
86
.$
13
92
47
3.$
-1
90
74
80
1.
DE
PR
EC
IATI
ON
$
8
59
50
.$
83
95
0.$
8
39
50
.$
63
95
0.$
9
24
70
.$
92
47
0.$
3
24
70
.$
92
47
0.$
1
03
70
0.$
1
03
70
0.
AFT
ER
TA
X
PR
OFI
T $
1
62
78
81
.$
17
27
36
9.$
1
84
97
44
.$
19
81
36
0.$
2
13
44
89
.$
22
79
04
1.$
2
40
48
37
.$
26
11
86
2.$
2
78
99
03
.$
29
87
11
8.
A.T
. E
AR
NIN
GS
1
71
18
31
. 1
81
13
19
. 1
93
36
94
. 2
06
53
10
. 2
22
69
59
. 2
37
15
11
. 2
53
73
07
. 2
70
93
32
. 2
89
36
03
. 3
09
08
18
. A
.T.
NE
T C
AS
H
FLO
W
10
14
48
5.
10
64
86
7.
11
34
90
6.
12
10
94
5.
11
64
81
2.
13
93
10
8.
14
90
88
3.
15
84
29
6.
15
01
12
9.
22
16
56
19
.
AC
UM
NE
T C
AS
H F
LOW
$
-10
27
7.0
M
$
-92
12
.1M
$
-80
77
.2M
$
-68
66
.2M
$
-57
01
.4M
$
-43
08
.3M
$
-28
17
.0M
$
-12
33
.1M
$
26
8.0
M $
2
20
33
.6M
SE
NS
ITIV
ITY
A
NA
LYS
IS
INTE
RN
AL
RA
TES
O
F R
ETU
RN
A
T A
DJU
STE
D
INP
UT
VA
LUE
S
120
PC
T 80
P
CT
90
PC
T 10
0 P
CT
110
PC
T TR
AN
S.
PR
ICE
/UN
IT
.141
.1
46
.150
.1
53
.157
Y
AR
D T
HR
UP
UT
.026
.0
89
.150
.2
11
.272
TOTA
L F.
C.
.158
.1
50
.150
.1
50
.150
FA
CIL
ITIE
S
CO
ST
.152
.1
51
.150
.1
09
.108
UN
IT
VA
R
CO
ST
.294
.2
15
.150
.0
96
.049
Tabl
e 3.
–DE
P o
utpu
t of c
ost c
ash
flow
(ope
ratin
g co
sts
and
reve
nues
) and
com
pute
d fa
cilit
ies
inve
stm
ent t
hat
allo
w a
15
perc
ent a
fter
-tax
rat
e of
ret
urn
to e
quity
inve
stm
ent
AIR-D
RY
ING
FA
CIL
ITIE
S*A
DD
10
A
CR
ES
(IN
VE
STM
EN
T TA
X
CR
ED
IT
OF
$ 10
3085
. C
ON
SID
ER
ED
.)
INIT
IAL
INV
ES
TME
NT-
-YE
AR
0
EFF
EC
TIV
E
TAX
R
ATE
.5
268
OR
IGIN
AL
CA
SH
E
QU
ITY
$1
0000
000.
V
.C./T
OT
TRA
N
RE
V=
.632
4 .1
600
EN
DIN
G
VA
LUE
O
F E
QU
ITY
$4
0455
928.
F.
C./T
OT
TRA
N
RE
V=
.034
0
TOTA
L IN
VE
ST.
$2
1841
534.
C
OM
PO
SIT
E
RO
R
.150
0 P
.V.
OF
EQ
UIT
Y(I=
.150
0)
$100
0008
8.
TAX
C
OS
TS/T
.T.R
. =
.169
3 A
.T.
PR
OFI
T/T.
T.R
=
.130
7
FAC
ILIT
IES
C
OS
T $1
1399
472.
B
OR
RO
WIN
G
RA
TE
WO
RK
ING
C
AP
ITA
L $1
0442
062.
R
EIN
VE
STM
EN
T R
ATE
.0
800
FAC
ILIT
IES
S
ALV
AG
E
VA
LUE
$
6490
913.
D
EP
R./T
.T.R
. =
.033
6
FIN
AN
CIA
L S
UM
MA
RY
W
ITH
B
RE
AK-
EV
EN
A
DJU
STE
D
FAC
ILIT
IES
C
OS
T(S
), D
EP
RE
CIA
TIO
N
AN
D
OV
ER
HE
AD
FAC
ILIT
IES
C
OS
T $
0. $
0
. $
0.
$
0.$
1
26
96
62
.$
0.$
0
.$
0.$
1
66
55
08
.$
-64
90
91
3.
WO
RK
ING
C
AP
ITA
L 7
30
77
6.
76
22
27
. 8
37
06
5.
89
53
23
. 9
58
17
8.
10
25
25
4.
10
96
59
6.
11
73
77
4.
12
56
04
2.
-19
19
72
96
.
INV
ES
TME
NT
$
73
07
76
. $
79
22
27
. $
83
70
65
. $
8
95
32
3.$
2
22
78
40
.$
10
25
25
4.$
1
09
65
96
.$
11
73
77
1.$
2
92
15
50
.$
-25
68
82
08
.
DE
PR
EC
IAT
ION
$
7
21
16
5.
$
72
11
65
. $
7
21
16
5.
$ 7
21
16
5.$
7
99
35
5.$
7
94
35
5.$
7
94
35
5.$
7
94
35
5.$
8
90
62
5.$
8
90
82
5.
AF
TE
R T
AX
PR
OF
IT
$
15
30
03
9. $
1
72
33
63
. $
2
04
68
87
. $
24
05
40
0.$
2
78
62
11
.$
31
24
40
8.$
3
60
89
67
.$
40
15
34
6.$
4
40
36
18
.$
48
11
69
1.
A.T
. E
AR
NIN
GS
2
25
12
03
. 2
44
45
28
. 2
76
80
52
. 3
12
65
65
. 3
59
05
66
. 1
91
87
63
. 4
00
33
22
. 4
80
97
01
. 5
29
44
43
. 5
70
25
16
.
A.T
. N
ET
CA
SH
FL
OW
1
52
04
27
. 1
66
23
01
. 1
93
09
87
. 2
23
12
42
. 1
35
27
25
. 2
89
35
09
. 3
30
67
26
. 3
63
59
27
. 2
37
28
93
. 3
13
90
72
5.
AC
UM
NE
T C
AS
H F
LOW
$-2
03
21
.1M
$
-18
65
8.8
M
$-1
67
27
.8M
$-1
44
96
.6M
$
-13
14
3.9
M
$-1
02
50
.3M
$
-69
43
.6M
$
-33
07
.7M
$
-9
34
.6M
$
3
04
55
.9M
BE
GIN
ING-
OF-
YE
AR
VA
LUE
S
FOR
M
ON
IES
.
. .
BO
RR
OW
ED
$
1184
1.5M
$
1032
1.1M
$
8658
.8M
$
6727
.8M
$
4496
.6M
$
3143
.9M
$
250.
3M
$ .0
M
$ .0
M
$ . 0
M
RE
INV
ES
TED
$
.0M
$
.0M
$
.0M
$
.0M
$
.0M
$
.0M
$
.0M
$
3056
.4M
$
6692
.3M
$
9065
.2M
SE
NS
ITIV
ITY
A
NA
LYS
IS
CO
MP
OS
ITE
P
ATE
S
OF
RE
TUR
N
AT
AD
JUS
TED
IN
PU
T V
ALU
ES
80
P
CT
90
PC
T 10
0 PC
T 11
0 P
CT
120
PC
T TR
AN
S.
PR
ICE
/UN
IT
.122
.1
37
.150
.1
62
.173
Y
AR
D T
HR
UP
UT
.001
.1
01
.150
.1
83
.021
TOTA
L F.
C.
.153
.1
51
.150
.1
48
.147
U
NlT
V
AR
C
OS
T .1
04
.174
.1
50
.117
.0
68
FAC
ILIT
IES
C
OS
T .1
72
.160
.1
50
.141
.1
33
YE
AR
-EN
D
VA
LUE
S .
. .
YE
AR
1
YE
AR
2
YE
AR
3
YE
AR
4
YE
AR
5
YE
AR
6
YE
AR
7
YE
AR
8
YE
AR
9
YE
AR
10
Y
AR
D T
HU
RP
UT
45
00
0.
45
00
0.
45
00
0.
45
00
0.
45
00
0.
45
00
0.
45
00
0.
45
00
0.
45
00
0.
45
00
0.
TRA
NS
. P
RIC
E/U
NIT
$
37
5.0
0
$
40
1.0
0
$
42
9.0
0
$
45
9.0
0
$
49
2.0
0
$
52
6.0
0
$
56
3.0
0
$
60
2.0
0
$
64
4.0
0
$
68
9.0
0
TOT
TRA
N
RE
VE
NU
E$
16
87
49
98
. $
1
80
44
99
8.
$ 1
93
04
99
8.
$
20
65
49
98
. $
2
21
39
99
8.
$ 2
36
69
99
8.
$
25
33
49
98
. $
2
70
89
98
. $
2
89
79
99
7.
$
31
00
49
97
.
INTE
RE
ST
INC
-EX
P
-18
94
64
5.
-16
51
37
7.
-13
85
10
9.
10
76
45
1.
-71
94
52
. -5
03
01
6.
-40
05
5.
24
45
11
. 5
35
38
5.
72
52
16
.
MA
T.
&
HA
ND
L.
CO
ST
$ 1
01
13
70
4.$
1
08
21
48
8.
$ 1
15
79
12
7. $
12
38
98
90
. $ 1
32
57
04
8. $
14
18
50
94
. $
15
17
81
16
.$
16
24
02
01
.$
17
37
70
67
. $
18
59
36
22
. IN
V.
TAX
&
IN
SU
R.
15
51
83
. 1
66
04
3.
17
76
68
. 1
90
10
8.
20
34
14
. 2
17
65
4.
23
28
90
. 2
49
18
7.
26
66
31
. 2
85
29
8.
LAB
OR
CO
ST
40
05
70
. 4
28
61
0.
45
86
13
. 4
90
71
5.
52
50
66
. 5
61
82
0.
60
11
48
. 6
43
22
8.
68
82
54
. 7
36
43
2.
TOTA
L V
AP
C
OS
T $
1
06
69
45
7.
$
11
41
61
41
. $
1
22
15
40
8.
$
13
07
07
13
. $
1
39
85
52
8.
$
14
96
45
68
. $
16
01
21
55
. $
1
71
32
61
6.
$
18
33
19
52
. $
1
96
15
35
1.
UN
IT
VA
R
CO
ST
$
23
7.1
0
$
25
3.6
9
$
27
1.4
5
$
29
0.4
6
$
31
0.7
9
$
33
2.5
5
$
35
5.8
3
$
38
0.7
2
$
40
7.3
8
$
43
5.9
0
PR
OFI
T e
CO
NTR
IB.
$
43
10
89
6.
$
49
77
48
0.
$
57
04
18
1.
$
65
07
83
3.
$
74
35
01
8.
$
82
02
41
3.
$
92
82
78
8.
$
10
20
18
9.2
$
11
18
34
30
. $
1
21
14
86
2.
FIX
ED
M
FG C
OS
T $
1
80
. $
1
93
. $
2
06
. $
2
21
. $
2
36
. $
2
52
. $
2
70
. $
2
89
. $
3
09
. $
3
31
. O
VE
RH
EA
D C
OS
T 5
74
01
1.
61
41
88
. 6
57
18
3.
70
31
85
. 7
52
40
8.
80
50
84
. 8
61
43
8.
92
17
34
. 9
86
25
6.
10
55
29
7.
TOTA
L F.
C.
$
57
41
91
. $
6
14
38
1.
$
65
73
89
. $
7
03
40
6.
$
75
26
44
. $
8
05
33
6.
$
86
17
08
. $
9
22
02
3.
$
98
65
65
. $
1
05
56
28
.
price(s) indicate(s) the price(s) at which products must be sold to allow for selling, operating, tax, and capital recovery costs as well as the profits prescribed by the discount rate used.
The maximum investment(s) that can be made and still yield a minimally attractive ROR is again a price-volume-cost break-even calculation. In DEP, total investment is defined as the sum of the facilities and working capital investment requirements. To obtain the maximum investment amount(s), overhead and depreciation data inputs are adjusted to correspond to the facilities costs as fixed percentages (table 3).
Data Requirements
Eighteen input variables must be assigned values in the data deck. The user must specify output and sequential analysis options. Blank coding forms are given in appendix A. An explanation of input variables is in appendix B.
The data deck consists of five types of data cards (figs. 1 and 2).
CARD TYPE 1: Title card. One card only. The title names the investment project analyzed.
CARD TYPE 2 Data and program control card. One card only. The Type 2 card is used to enter two types of DEP data: (1) Costs and investment estimating factors that can be assumed to remain constant over the period of analysis and (2) values that will be used by the program to select the types of analyses to be run and to specify the number of output copies to be printed.
Inventory Tax Inventory tax is the tax rate applied to the drying lumber in inventory when taxes are assessed (the basis upon which taxes are applied will be discussed in the section on “Tax Rate”). The particular tax rate used will depend on the county where the dry or dried lumber is stored. For tax purposes it is usually advantageous to value the lumber at the lower of cost or market.
Working Capital Working capital is the monies required to maintain raw material, goods in process, and accounts receivable necessary for the future production of revenues. Working capital also includes those operating costs accrued by goods in process and finished products. Operating costs include total fixed and variable costs.
Working capital requirements are a beginning-of-period expense. DEP computes them as year-ending values for the year preceding the period requirements. For this reason the first year’s working capital requirements are denoted (in the program output) as Year 0’s requirements. This method of assignation and computation continues through each year of the project’s life.
Working capital requirements accrue to the lumber starting from the day they enter inventory and end the day they are cash credited. This may be after they are received by a buyer, or when the lumber account is transferred in the books to another division of the same company. Capital requirements include those required for the initial purchase and for all subsequent handling costs. Because lumber must lie idle in the air- and kilndrying facilities, not being able to use the funds tied up in inventory represents an opportunity cost (return on investment capital) against which final operating profitability must be compared.
The factor used in the program to compute working capital requirements is the weighted average of time lumber remains unredeemed as a cash transaction. Percentage amount of annual lumber throughput in inventory is used as the factor for program computations. This factor is multiplied times the year’s annual operating costs to determine working capital requirements.
Under other (perhaps more typical) manufacturing conditions it might be possible to assume a 30-day working capital supply and use the percentage factor 0.0822 (30 ÷ 365 = 0.0822).
Tax Rate In general a variety of taxes is levied yearly against real and personal property, including inventory. Local tax rates may be different for every county in a state, and because taxes may be applied to real and personal property according to a schedule that may change every year according to inflation and other economic factors, it is necessary to go to company records, or to the local tax assessor, to get accurate data on property evaluation for tax purposes.
Federal and state income taxes typically take about 50 percent of taxable corporate income. Taxes are an important consideration because of their effects on both amounts and timing of after-tax net cash flows-especially when alternatives being considered have equal PVl’s or ROR’s, or both, on a before-tax basis but not on an after- tax basis. This is most likely when there are such considerations as investment tax credits on new machinery and different state and local tax rates.
The tax rate used in DEP should represent the effective Federal and state income tax rates. This rate is entered in the program and is applied automatically to taxable income.
Discount Rate The discount rate chosen for calculation of the present value of investment should represent the annual compound rate of return that might reasonably be expected from well chosen investments in other ventures with similar risk. In this way, PVI can be used as a comparative measure of venture profitability. That is, if PVI is zero the venture analyzed is equal in investment earning to alternative opportunities. If PVI is greater the venture analyzed indicates greater dollar earning potential than other alternatives, and vice versa. The discount rate chosen represents the opportunity cost of investment monies required for the financing of inventories and processing costs.
5
6
Figure 2.–DEP data coding expample for sequential run analysis.
Years Considered DEP allows computations based on 2 to 20 years beginning from the time “end of Year 0.” The number the user selects will be the investment time frame for the life of the project. It may also be used to provide a standardized time frame that may exceed the useful life of the project but which serves as a basis for comparison with projects having different useful or economic lives.’
The “useful life” specified for the project evaluation should be consistent with the concept of economic life and depreciation range used for the facility. The Federal Internal Revenue Service Class Life Asset Depreciation Range may be used for estimating the useful life of a facility. Any modifications, additions, or repairs that would extend the useful life of the facility, or increase its productive capacity, would normally be considered as new investment costs.
Output Copies DEP will compute and provide printed output for three types of analyses. When the user places a number in one or more of three different positions, the computer is signaled to perform a specific type of analysis. A number from one to nine will indicate the number of copies of printed outputs to be produced.
Financial The computer figures cash flows before and after taxes and prints associated economic criteria used for decisionmaking.
Price/Cost Break-Even The computer totals the unit cost of production in terms of the unit price required to generate revenues equal to the associated investment, operating costs, taxes, and profits established by the data inputs.
Facilities Investment Break-Even The program computes the facilities investment costs, associated levels of overhead cost, depreciation, and working capital requirements that will break even in the context of other values of price-cost-volume data input. Ad valorem overhead costs and depreciation are adjusted as constant percentages of facilities costs. In addition, the program recalculates working capital as necessary based on these adjusted overhead costs.
Original Cash Investment The original cash investment is the original amount of equity used to initiate a particular project; it may consist of funds from without or within the firm. The program assumes the value to be an end-of-Year-0 amount. That is, that the money is available at the start, and not at some time during the project.
If an amount is entered, DEP computes a composite ROR and, with it, annual interest income and expense cash flows, and the annual money capital deficit or surplus position of the project.
If no amount is entered here, an internal ROR will be computed that may be used to compare the project with alternative investment opportunities.
Borrowing Rate DEP allows specification of a borrowing rate for computations of the composite ROR. The amount to be borrowed, time for repayment, method of repayment, security provided against the funds borrowed, anticipated conditions in the different money markets, etc., will all typically affect the amount of interest that will have to be paid for borrowed capital. DEP computes borrowing requirements and payback of such financing as rapidly as net cash flows will permith Truly long-term borrowing costs should be entered on operating cost for composite ROR calculations.
Reinvestment Rate The reinvestment rate is used when computing the composite ROR for specifying short-term interest earning on monies reinvested from operating cash surpluses. A cash surplus may become available either during the course of the project or after, when certain assets may be liquidated. In the latter case–i.e., when the project’s terminal year occurs prior to the year ending a standardized time frame–the program will use the discount rate to determine the post-terminal interest income that might be earned. Such post-terminal calculations are done for both composite and internal ROR.
CARD TYPE 3 Annual price-volume-cost data. One card for each year, up to 21 cards.
The DEP program assumes that all values entered on the Type 3 cards are year-ending values. The data typically used to hypothesize the cash flow characteristics of an investment project are either data projections or forecasts. In either case, the Type 3 card data should be prepared as year-ending values.
Selling Price The selling price is the value assigned a dry unit of lumber, usually 1,000 board feet (1 MBF). In evaluating a system in which there are many types of drying lumber, the selling price may have to represent an average for the mix.
It is not necessary to specify the exact selling price when doing the “price/cost break-even” analysis, because the selling price is computed (as described) as the price required to cover other price-volums-cost inputs. However, hypothetical values must be entered to indicate anticipated changes in relative values among periods. For example, were a 7 percent price inflation rate expected, $100 may be entered for the first year and $107 for the second year, etc., to establish the program’s computational routine of a 7 percent per year increase. Or, if in 3 years it were assumed there would be a business downturn, relative cost inputs could be adjusted to indicate the expected effects on selling price.
Yard Throughput Yard throughput is the volume of lumber dried and passed through inventory in 1 year. The volume is multiplied by the selling price to calculate annual revenue generated by the drying facilities.
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Materials and Handling These include equipment lumber (pile foundations and bolsters), shipping and handling, and electricity and fuel costs for the equipment used for handling inventory. These are part of the total variable costs of the lumber drying process. They vary directly with the volume of inventory processed.
Labor In DEP, the labor category includes all labor costs (optionally including supervisory costs) including costs for fringe benefits–e.g., insurance, social security payments, etc. In a traditional accounting sense, a supervisor’s salary might be considered overhead cost. For illustration, it was decided to combine labor and supervisory costs to form a basic “labor”-related grouping whose “sensitivity” could be analyzed.
Fixed Manufacturing Fixed costs are those associated with the physical plant, that must be paid regardless of output. Fixed costs may include rental, interest on borrowed funds, insurance premiums, salaries of top management, property taxes, utility service charges, etc.
Overhead Overhead costs include repair and maintenance, property tax, facilities insurance, travel, telephone, and contingency costs.
Facilities These are the costs associated with establishing the fixed assets required for revenue-producing operations. These investments may include costs for replacements, additions, modifications, or repairs that may be incurred to increase a facility’s operating capacity, or to extend its useful life. Initial facilities costs are considered part of end-of-Year-0’s investment. They continue to be treated as end-of-year investments as such costs may occur in subsequent years. Typical investment or “facilities” costs are those for land, machinery, mobile equipment, engineering, and other costs needed to establish assets necessary for processing operations.
Investment Tax Credit A credit of 10 percent of the value of investment in manufacturing equipment (having an estimated useful life of 3 years or more) is applied against current tax liabilities. According to IRS rules, this credit may not exceed the current year’s tax liability. In DEP, however, investment tax credit and all tax losses are all taken in the year(s) they occur with no carry-back or carry-forward. This assumption is based on the presumption that there will always be a sufficient tax liability for a company to take advantage of the tax “benefits” of any investment tax credit.
Depreciation Fixed depreciable assets–those to which depreciation allowances may apply–are considered to be those tangible assets that are related to the lumber drying operations and inventory preparation and storage, and that will wear,
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deteriorate, or waste over time. These assets fall into four broad categories: 1. Land improvements such as fences, drainage systems, grading, pile bases, and bolsters related to the lumberyards and necessary for their functioning, 2. Buildings to protect equipment, roofs for stored lumber, sheds to protect stickers, etc., 3. Equipment for assembling units for drying, and 4. Forklifts, pickup trucks, and other mobile equipment.
These classifications do not include the land on which lumber is stored as land is a nondepreciable asset.
Because depreciation allowances typically have significant impact on a project’s after-tax net cash flows, depreciation should be considered carefully.
CARD TYPE 4 Sequential run control card. One card only. A sequential run control card must follow the last Type 3 card used in the data deck. The number entered on this card determines the number of Type 5 cards read and the number of sequential DEP analyses that will be computed. The purpose of the sequential run option is to simplify the task of preparing data when Type 3 card data may be used as the prototype.
If the Type 4 card is left blank, analyses will be computed and printed on the basis of the data entered on the Type 2 and 3 cards, and no Type 5 cards need to be added to the data deck. If a number 1 through 10 is entered on the Type 4 card, an unaltered analysis of Type 2 and 3 card data will be omitted unless one or more of the following Type 5 cards submitted is entirely blank.
CARD TYPE 5: First year data card. One card for each sequential analysis, up to 10 cards. By using the sequential DEP analysis option a series of analyses may be made on the basis of adjusted Type 2 and 3 card data–i.e., original cash investment, borrowing rate, lending rate, unit price, unit sales, unit manufacturing costs, other variable costs, fixed manufacturing costs, and overhead costs. The price-volume-cost data entered on Type 5 cards should represent only first-year values. The DEP program will compute the annual sequence of values as a percentage of Type 3 data established by the ratio of card 5 to card 3 first-year values.
Printed Output Printed output consists of a modified operating statement, with yearly cash flows followed by a sensitivity analysis (tables 1, 2, and 3). The program will solve for different variables on the income statement, depending on the analytic options chosen (figs. 1 and 2). The sensitivity analysis at the bottom of the output indicates the sensitivity of the internal or composite rates of return to changes in five key input variables. Sensitivity is computed as point computations under stated change of revenues, costs, and investment. The sensitivity analysis aids the identification of input variables having the greatest impact on rate of return. Once identified, these key variables can be analyzed more carefully.
Assumptions and Limitations Although DEP is a powerful tool for analyzing investments in lumber drying facilities, some simplifying assumptions have been made. Because these assumptions may limit the scope of usefulness, they are here clearly identified. 1. Investment tax credits and income tax refunds due to early losses are taken in the year in which they occur. This implies that the firm has sufficient profits from other ongoing activities to take advantage of all tax credits. 2. All cash flows occur on the final day of each period of analysis. Although this method does not represent typical patterns of business transactions it does provide an approximating and easily definable technique. 3. For composite ROR calculations, all borrowing requirements are assumed to be secured as short-term loans with repayment as rapidly as operating cash flows will permit. No loans for the project will be part of the firm’s permanent capital structure. 4. Borrowing and reinvestment (lending) rates are considered constant over the periods analyzed. 5. Divestment of facilities occurs at the termination of operating cash flows, with no book gains or losses on the sale or salvage value of assets.
Summary Because of the particular consideration the DEP program provides for lumber drying investment projects, it can be a valuable tool to assist in the analysis of investments in lumber-drying facilities. DEP’s flexibility allows the
calculation of rate of return, break-even transfer prices, or break-even facilities costs. Data input requirements are simplified into basic analytical components that may be easily modified for analyses that only require increases or decreases of initial price-volume-cost input data.
Additional Reading
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Appendix B–Principal Equations of the Drying Economics Program (DEP)
Most computations involved with calculating the output for the drying economics program involve only addition and subtraction. The more complex calculations are explained:
Working capital Because this money must be on hand at the beginning of the year, working capital is entered as an end-of-year value for the preceding year. Working capital (WRK) is computed as:
WRK(K) = (TVC(K + 1) + TFC(K + 1) – ITI(K + 1)) * WKR – TWC(K – 1)
where K = current,
TVC = total variable cost, TFC = total fixed cost,
WKR = percent of annual production in inventory, and TWC = total working capital.
ITi = inventory tax and insurance,
After-tax profit
where REV = revenue, INT = interest expense (used only to compute
DEP = depreciation, and composite rate of return),
TXRT = tax rate.
After-tax earnings
ATE = ATP + DEP
After-tax net cash flow
ATNCF(K) = ATE(K) – INV(K) where
INV = year's investment.
Accumulated net cash flow
ANCF(K) = ANCF(K – 1) + ATNCF(K)
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ATP = (REV – (INT + TVC + TFC + DEP)) * (1 – TXRT)
Appendix C–Listing of Drying Economics Computer Program (DEP)
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U.S. Forest Products Laboratory
DEP–A Computer Program for Evaluating Lumber Drying Costs and Investments, by Stewart Holmes, George B. Harpole, and Edward Bilek. Madison, Wis., For. Prod. Lab., 1983.
20 p. (USDA For. Serv. Gen. Tech. Rep. FPL-37)
The DEP computer program is a modified discounted cash flow program designed for analysis of problems involving economic analysis of wood drying processes. 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.
Keywords: Discounted cash flow analysis, forest products utilization economics, engineering economy, lumber drying, investment analysis, computer programs, lumber drying costs.
U.S. GOVERNMENT PRINTING OFFICE: 1983 654 025 4008