CHAPTER 13

FINANCIAL MODELING CASE STUDY IN FORESTRY PROJECT EVALUATION

ANSWERS TO REVIEW QUESTIONS
QUESTIONS
13.1 Consider an investment area with which your are familiar. What (if any) software
packages are available designed specifically for financial analysis in this area? What
features do these packages possess which you consider useful for project evaluation?
13.1 Consider an investment area with which your are familiar. Suppose development of a
financial model which can be used to evaluate a range of investment proposals is being
contemplated.
(a) Identify some of the uses to which such a model could be put.
(b) Which financial performance criteria would you consider to be most appropriate for
these types of applications? Explain your logic.
(c) How would you suggest the generic model should be designed? Suggest a model
structure and set of features, and illustrate with diagrams.
(d) What default data do you think would be useful to include in this model?
(e) Develop designs for:
(i)
(ii)
(iii)

the opening computer screen for the model

data input screens
data output screens.

(f) Explain how such a model could be tested and how it might be maintained.
ANSWERS
Answer to Q 13.1
This question is designed to have the reader explore the availability of generic capital
budgeting software in their specific area of interest. No general solution can be provided,
since software availability will vary on a case by case basis. With regard to the first part of
the question, often commercial or public access software will be available, so the challenge is
to locate what relevant software is available, determine its capabilities in terms of what is
needed, and hence decide whether it is adequate for the task or whether specific purpose
software needs to be developed. For the second part of the question, the items on Table 13.2
provide an initial guide to types of package features which may be useful, though the list will
need to be adapted according to the type of project considered.

Answer to Q 13.2
Again, no specific answer can be provided to this question, since the answers will vary on a
case by case basis. However, some general suggestions can be made.
(a) Model uses could include evaluation of specific investment project proposed by a
particular firm (e.g. to test for project feasibility, to aid project design, to explore the
financial requirements, to provide information to support a loan application),
supporting staff training purposes, supporting investment consulting services, and
commercialization of the package.
(b) In general, the NPV is regarded as the most useful financial performance criterion.
However, a rate of return criterion (typically the IRR) may also be required, as may
the payback period.
(c) Designs for input and output screens, arrangements for storing default data in the
program, and analysis routines need to be considered. The discussion relating to the
ACTFM model in the chapter provide an initial guide , though the model structure
and features will need to be adopted according to the type of generic model being
considered.
(d) Default parameters may be related to standard prices and costs, and to physical
performance of production systems. These are likely to be values which are relatively
constant over a number of applications. Table 13.1 provides default values used in the
ACTFM model.
(e) Screen designs are to some extent a matter of choice for layout, colour and
information content. Normally, the opening screen would indicate the name of the
package, ownership, maybe a disclaimer, and some device for navigating to one or
more other screen. Attractive design and colour is often sought. Input and output
screens need to group alike data types. The former may display default data. For
project evaluation, the latter would normally include discounted cash flow
performance criteria, such as NPV and IRR.
(f) Model testing is not a one-shot task, but is performed throughout the development of
the model as it (typically) evolves through a number of prototypes. It is important to
have a variety of people with different backgrounds and perspectives (e.g. different
potential users) carry out analyses using the model, to test its various features (input
and output routines, ability to cope with out-of-range data, navigation across screens,
stability of computer runs, scope of the analysis, accuracy of the output values).
Program maintenance can be a major problem, should the developer depart and others
be required to update the package or trouble-shoot for users external to the firm or
agency.