RE: Compounded Cost for subsquent treatments


The Guide for Plant Appraisal, eighth edition, provides for compounding costs in cases where small plants by planted to replace larger ones, and then compounding the costs over a number of years to grow the plant to the original size. Compounding the cost of the new plant is simple and direct- you select an appropriate plant, determine the years to grow it to size, and select an interest rate for compounding.

You can also include in these calculations any additional costs for subsequent treatments that may be deemed necessary for the care and maintenance of the new plant. For example, you may have to include the cost of irrigating the plant for a few years through the establishment period, or perhaps fertilizer treatments to encourage development of the root system.

The Guide calls these items the “cost of annual maintenance” (page 55). They are compounded only from the time those costs are incurred to the end of the compounding cycle. For example (from page 55), a second year cost in a 10 year cycle is compounded for 8 years.

I have a problem with this, under certain circumstances. My estimate of the cost of the treatment must be based on either the current cost for the treatment or a projected cost 2 years from now. The farther into the future we have to project, the less certain the numbers will be. If I elect to base those projected costs on current costs for the treatment, I propose that they should be compounded for the full term of the compounding cycle.

If a fertilizer treatment for a young tree costs $100 today, it will not (necessarily) cost the same 2 years from now. The firm hired to perform the work will likely increase their prices to reflect inflation (the purpose for compounding in the first place). So to project the cost of the treatment 2 years from now, I must adjust the cost for inflation over that time. Now I can put this number in the formula, and compound for the remainder of the cycle. Why not just include the direct cost, in today’s dollars, and compound over the entire period of the cycle?

Your comments would be appreciated. Hopefully these discussions will find their way to the Council of Tree and Landscape Appraisers.

Russ Carlson

Reply to post by Russ Carlson, on April 10, 1998 at 16:49:25:

I think that in order to avoid getting into a situation where we are backed into a corner in defense of our conclusions, we need to base our projected costs on todays dollar. We must have a stable base upon which to rely for a credible result. We know what the dollar is worth today.

If a lawyer wants to know why inflation isn't figured there, it is easier to pose the question: "How much is the dollar going to be worth 5 years from now?" to the lawyer; than it would be to answer that question as posed by a lawyer.

The system is to some degree vulnerable in that we are projecting growth amounts. How much is that cherry tree going to grow per year, in that site, with next year's weather conditions?

Just my thoughts,
KWK

Reply to post by Kerry W Knorr, on April 10, 1998 at 16:49:25:

You wrote:>> If a lawyer wants to know why inflation isn't figured there, it is easier to pose the question:
"How much is the dollar going to be worth 5 years from now?" to the lawyer; than it would be
to answer that question as posed by a lawyer.

We do have historical data on monetary inflation, and this is often used as a basis for projecting lost income and earnings. If we disclose how the determination is made and the parameters used, I think it is an acceptable method in some cases.

As to projecting growth of the cherry tree next year, we can again collect historical data. How has this tree been growing recently, and can we expect similar growth for a period of time? Nature is not fully predictable, but neither is it totally random.

I find it interesting that there has been no other comment on this topic yet. Where is everybody?

Reply to post by Russ Carlson, on April 24, 1998 at 01:08:17:

No one has abandoned you, Russ. We're right here, semi-sane and half asleep.
As my buddy (you know who) always says.... the justification for these values ALWAYS goes back to the reasonableness test.
Are yourappraisal values reasonable in relation to real estase values. Are your inflation figures "reasonable" in relation to historic inflation values? Am I reasonable? NO, but you must be because you are the expert on the stand.
If you can convince the judge or jury that you have done your reasonableness homework - then you will win the argument.
My buddy would be proud to see that all his many words have not fallen onto deaf ears. He really has taught me some stuff during all those hours of discussion about reasonableness.
Wha'cha think?

Reply to post by Russ Carlson, on April 24, 1998 at 01:08:17:

I'm not disagreeing with you on this point. Sure, we can guesstimate with fair accuracy on all kinds of things. My point is: that as much as possible, given the variable circumstances, the appraiser should use as much tangible information as possible. When necessary, we can dip in to the theoretical.

Reply to post by Kerry W Knorr, on April 10, 1998 at 16:49:25:


Estimate approximately 4% per year for inflation. Todays UK costs per point in the amenity valuation is £14.03.

Paul H.

Reply to post by Russ Carlson, on April 24, 1998 at 01:08:17:

Russ,
I have been thinking of your question about applying the compounded interest method, and I really don't think it makes much difference how you apply it, as long as you can justify it in court. After all, the guide is a guide is a guide, and not meant to be a rule book. We have all departed from some methodology from time to time, and should try to remember the reasonableness testing.
Very treely,
lew

Reply to post by Russ Carlson, on April 10, 1998 at 16:49:25:

Russ - I see your dilemma. They way I deal with it is to calculate a 'Capital Value' for the tree(s) in question. This value is comprised of a number of elements:

1.Cost of the replacements & planting
2.Appraised value of the loss
3.maintenance
4.Safe Useful Life Expectancy
5.Amenity Value
6.Wildlife Value
7.Species Value

Not all factors combine in all situations, but once you have derived a 'Capital Value' then you can compound this over the time involved.
Alternatively
Omit maintenance from the equation - calculate 'Capital Value' then derive a reasonable maintenance cost as a % of the Capital value, add this to Capital Vale and compound. Or compound the maintenance separately and add to the final figure.

Her in England, Municipalities often 'adopt' a woodland or a green area or some trees from a developer. In such situations, there is a formula that allows for the Municipality to take the asset on with a commuted sum attached. This is a sum of money which is invested and yields enough money to allow for management into the future -
Just a thought

Reply to post by Dealga OCallaghan, on April 10, 1998 at 16:49:25:

Dealga, glad to see you found us here.

I like some of your comments on the values, and will have to consider and digest them. At first look, it seems I apply much of those concepts already, in one form or another.

Russ