A high level of economic growth is anticipated during the next long-term development plan and will lead to substantially increased domestic demand for wood products. The pulp and paper industry has also been identified as a potential major export industry for the future. As part of a wider study to examine the options available to achieve the targets set-out in the next development plan, one of the Minister's special advisers has established a team to investigate the long-term profitability of different wood processing industries. The team will examine the profitability of the following options:

1. increase the domestic market share of sawnwood and moulding produced by existing mills from 10% to 15%;
2. increase the domestic market share of plywood produced by existing mills from 5% to 10%;
3. construct new mills to supply sawnwood and mouldings to the domestic market;
4. construct new mills to supply plywood to the domestic market;
5. construct new pulpmills supplied by wood from the natural forest and residues; and
6. construct new pulpmills supplied by wood from the natural forest and then later by wood from plantations.

You have been picked as a member of this team and have been asked to prepare a short presentation on the profitability of one of the above options. The following pages contain all of the information which will be required to investigate each of these options. The first set of sheets (BACKGROUND DATA) contains information about product prices and capital and operating costs for mills of an average size in each of the industries. The second set of sheets (QUESTION SHEET) contain specific questions which you must answer in order to comment on each of the options above.

Other members of the team will be assisting you with this task, so you do not have to complete all of the question sheets. Your contribution to the team's work will be to complete the following tasks:

1. Read the QUESTION SHEET for the chosen option(s).
2. Enter the background data and make the necessary changes to the Forest Industry Model for the chosen option(s).
3. Prepare a short report and presentation on your results.

QUESTION SHEET (OPTION 1: INCREASE PROPORTION OF SAWNWOOD AND MOULDINGS PRODUCED FOR LOCAL MARKETS BY EXISTING MILLS)

In order to comment on the profitability of this option, you should first enter the relevant data from the BACKGROUND DATA sheets given above into the Forest Industry Model.

You should then answer the following questions:

1. What has been the average price of sawnwood and mouldings sold in the domestic and export markets over the last few years?
2. All sawnwood and about 10% of mouldings production is currently sold on the domestic market. Based on the cost information presented in the background data and the prices calculated above, what rate of return are sawmills currently achieving? Alternatively, what is the current annual profit (annualised NPV) of these sawmills using a discount rate of 15%?
3. If production of sawnwood was to increase by 50% in mills (to meet the forecast increase in demand), then assuming that overall log supply remained the same, by how much would mouldings production fall?
4. What share of this reduced mouldings production would have to be sold on the domestic market to meet the forecast increase in demand from 10% to 15% share of production?
5. What effect would these new production levels have on the rate of return and profitability of sawmills?
6. Increased domestic demand would be likely to lead to increased domestic prices. What effect would domestic price increases have on the rate of return and profitability of sawmills with these new production levels?

It is suggested that, for your presentation, you prepare slides showing the following information:

1. A table showing current and future production levels of each of the products and the rate of return and profitability of sawmills at current and future production levels.
2. A chart or charts showing the effect of price increases on the rate of return and profitability of sawmills.

QUESTION SHEET (OPTION 2: INCREASE PROPORTION OF PLYWOOD PRODUCED FOR LOCAL MARKETS BY EXISTING MILLS)

In order to comment on the profitability of this option, you should first enter the relevant data from the BACKGROUND DATA sheets given above into the Forest Industry Model.

You should then answer the following questions:

1. What has been the average price of plywood sold in the domestic and export markets over the last few years?
2. About 5% of plywood production is currently sold on the domestic market. Based on the cost information presented in the background data and the prices calculated above, what rate of return are plymills currently achieving? Alternatively, what is the current annual profit (annualised NPV) of these plymills using a discount rate of 15%?
3. If production of plywood for the domestic market was to increase from 5% to 10% (to meet the forecast increase in demand), then assuming that overall log supply remained the same, what effect would these new production levels have on the rate of return and profitability of plymills?
4. Increased domestic demand would be likely to lead to increased domestic prices. What effect would domestic price increases have on the rate of return and prof itability of plymills with these new production levels?

It is suggested that, for your presentation, you prepare slides showing the following information:

1. A table showing current and future production levels of plywood for the domestic and export markets and the rate of return and profitability of plymills at these production levels.
2. A chart or charts showing the effect of price increases on the rate of return and profitability of plymills.

QUESTION SHEET (OPTION 3: CONSTRUCT NEW MILLS TO PRODUCE SAWNWOOD AND MOULDINGS FOR LOCAL MARKETS)

In order to comment on the profitability of this option, you should first enter the relevant data from the BACKGROUND DATA sheets given above into the Forest Industry Model.

You should then answer the following questions:

1. What has been the average price of sawnwood and mouldings sold in the domestic market over the last few years?
2. Based on the cost information presented in the background data and the prices calculated above, what would be the rate of return for a new sawmill producing sawnwood and mouldings only for the domestic market? Alternatively, what annual profit (annualised NPV calculated using a discount rate of 15%) would it earn?
3. Increased domestic demand would be likely to lead to increased domestic prices. What effect would domestic price increases have on the rate of return and profitability of new sawmills supplying only the domestic market?

It is suggested that, for your presentation, you prepare slides showing the following information:

1. A table showing the long-run domestic price of sawnwood and mouldings (based on historical data) and the rate of return and profitability of new sawmills at these prices.
2. A chart or charts showing the effect of price increases on the rate of return and profitability of new sawmills.

QUESTION SHEET (OPTION 4: CONSTRUCT NEW MILLS TO PRODUCE PLYWOOD FOR LOCAL MARKETS)

In order to comment on the profitability of this option, you should first enter the relevant data from the BACKGROUND DATA sheets given above into the Forest Industry Model.

You should then answer the following questions:

1. What has been the average price of plywood sold in the domestic market over the last few years?
2. Based on the cost information presented in the background data and the prices calculated above, what would be the rate of return for a new plymill producing plywood only for the domestic market? Alternatively, what annual profit (annualised NPV calculated using a discount rate of 15%) would it earn?
3. Increased domestic demand would be likely to lead to increased domestic prices. What effect would domestic price increases have on the rate of return and profitability of new plymills supplying only the domestic market?

It is suggested that, for your presentation, you prepare slides showing the following information:

1. A table showing the long-run domestic price of plywood (based on historical data) and the rate of return and profitability of new plymills at this price.
2. A chart or charts showing the effect of price increases on the rate of return and profitability of new plymills.

QUESTION SHEET (OPTION 5: CONSTRUCT NEW PULPMILLS TO PRODUCE PULP FROM WOOD FROM THE NATURAL FOREST AND RESIDUES)

In order to comment on the profitability of this option, you should first enter the relevant data from the BACKGROUND DATA sheets given above into the Forest Industry Model.

You should then answer the following questions:

1. What has been the average price of pulp sold in the domestic and export markets over the last few years?
2. Based on the cost information presented in the background data and the prices calculated above, what would be the rate of return for a new pulpmill producing 70% pulp for export and 30% pulp for the domestic market? Alternatively, what annual profit (annualised NPV calculated using a discount rate of 15%) would it earn?
3. Increased domestic demand is likely to lead to increased domestic prices. What effect would domestic price increases have on the rate of return and profitability of new pulpmills supplying these two markets?

It is suggested that, for your presentation, you prepare slides showing the following information:

1. A table showing the long-run export and domestic prices of pulp (based on historical data) and the rate of return and profitability of new pulpmills at these prices.
2. A chart or charts showing the effect of price increases on the rate of return and profitability of new pulpmills.

QUESTION SHEET (OPTION 6: CONSTRUCT NEW PULPMILLS TO PRODUCE PULP FROM WOOD FROM THE NATURAL FOREST AND LATER, FROM PLANTATIONS)

In order to comment on the profitability of this option, you should first enter the relevant data from the BACKGROUND DATA sheets given above into the Forest Industry Model.

You should then answer the following questions:

1. What has been the average price of pulp sold in the domestic and export markets over the last few years? Pulp made from plantation grown wood would sell for about 10% more than mixed tropical hardwood pulp, what price might the pulpmill owner get for this product?
2. Based on the cost information presented in the background data and the prices calculated above, what would be the rate of return for a new pulpmill producing 70% pulp for export and 30% pulp for the domestic market? Alternatively, what annual profit (annualised NPV calculated using a discount rate of 15%) would it earn? (Note, the mill would produce pulp from wood from the natural forest for years 1 to 7 and pulp from plantation grown wood from year 8 onwards).
3. Increased domestic demand is likely to lead to increased domestic prices. What effect would domestic price increases have on the rate of return and profitability of new pulpmills supplying these two markets?

It is suggested that, for your presentation, you prepare slides showing the following information:

1. A table showing the long-run export and domestic prices of pulp made from wood from the natural forest and from plantations (based on historical data) and the rate of return and profitability of new pulpmills at these prices.
2. A chart or charts showing the effect of price increases on the rate of return and profitability of new pulpmills.

BACKGROUND DATA (SHEET 1 OF 9)

Mill and model details

BACKGROUND DATA (SHEET 2 OF 9)

Concession log costs and other roundwood variables (US$/m³)

1. Note: 1. A new pulpmill constructed under option 6 will require pulpwood from the natural forest for years 1-7 until plantations are ready for harvesting.

BACKGROUND DATA (SHEET 3 OF 9)

Fixed and variable costs (US$/m³)

BACKGROUND DATA (SHEET 4 OF 9)

Initial capital requirements (US$ 000)

Replacement capital requirements (US$ 000)

BACKGROUND DATA (SHEET 5 OF 9)

Price information

BACKGROUND DATA (SHEET 6 OF 9)

Price information

BACKGROUND DATA (SHEET 7 OF 9)

Production start-up schedule for a new sawmill

BACKGROUND DATA (SHEET 8 OF 9)

Production start-up schedule for a new plymill

BACKGROUND DATA (SHEET 9 OF 9)

Production start-up schedule for a new pulpmill