United States

Department of

Agriculture

Forest Service

Southern

Research Station

General Technical

Report SRS–69

PROACT User’s Guide:

How to Use the Pallet Recovery

Opportunity Analysis

Computer Tool

E. Bradley Hager, A.L. Hammett,

and Philip A. Araman
Jennifer D. Knoepp, Research Soil Scientist, and

James M. Vose, Project Leader, U.S. Department of

Agriculture, Forest Service, Southern Research Station,

Coweeta Hydrologic Laboratory, 3160 Coweeta Lab Road,

Otto, NC 28763.

The Authors:

E. Bradley Hager and A.L. Hammett are Cunningham Fellow and Associate

Professor, respectively, Center for Forest Products Marketing and Management,

Virginia Polytechnic Institute and State University, Blacksburg, VA 24061; and

Philip A. Araman is Project Leader, U.S. Department of Agriculture, Forest

Service, Southern Research Station, Blacksburg, VA 24060.

August 2003

Southern Research Station

P.O. Box 2680

Asheville, NC 28802

Disclaimer

The application tool described in this publication is available upon request with the understanding

that the U.S. Department of Agriculture cannot assure its accuracy, completeness, reliability, or

suitability for any other purposes than that reported. The recipient may not assert any proprietary

rights thereto nor represent it to anyone as other than a Government-produced computer tool.

The use of trade or firm names in this publication is for reader information and does not imply

endorsement by the U.S. Department of Agriculture of any product or service.
i

PROACT User’s Guide:

How to Use the Pallet Recovery

Opportunity Analysis Computer Tool

E. Bradley Hager, A.L. Hammett, and Philip A. Araman
ii
iii

Table of Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Arrangement of This User’s Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Getting Started . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Hardware and Software Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

User Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Installation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Workbooks, Worksheets, and Cells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Inputs Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

I. Title Information and Basic Financial Inputs . . . . . . . . . . . . . . . . . . . . . . . 3

II. Product Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

III. Pallet Acquisition, Processing, and Flooring Manufacture . . . . . . . . . . . . . 6

IV. Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

V. Facility and Transportation Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

VI. Wood Waste Disposal Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

VII. Marketing and Management Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

VIII. Equipment and Facility Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

IX. Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

X. Net Working Capital and Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

XI. Optional Tools (Weighted Average Cost of Capital Calculator) . . . . . . . . . 16

The Reports Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

I. Summary Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

II. Summary of Annual Net Cash, Revenues, and Material Flows . . . . . . . . . 20

III. Sensitivity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Literature Cited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
iv
1

Abstract Pallet recovery projects are environmentally responsible and offer promising business opportunities. The

Pallet Recovery Opportunity Analysis Computer Tool (PROACT) assesses the operational and financial

feasibility of potential pallet recovery projects. The use of project specific information supplied by the user

increases the accuracy and the validity of the feasibility study. Different scenarios of the same project can

also be compared easily because changes in input are instantly reflected in the feasibility study results.

PROACT is designed for use with Microsoft® Excel®—the most widely used spreadsheet program on the

market today. It is easy to use, even for those unfamiliar with computer spreadsheet programs. PROACT is a

workbook with three worksheets. This guide provides users with a complete tour of two of these

worksheets—inputs and reports—by describing cells, defining terms, illustrating all on-screen tables and

charts, and using an example project.

Keywords: Building materials, economic development, financial analysis, flooring, green products, pallet

lumber, pallet recycling, pallets, recycled wood flooring, wood recycling.

Introduction A large number of discarded pallets are deposited in landfills or ground into low-value

wood fiber products. Research indicates that 223.6 million wooden pallets entered

municipal solid-waste landfills in 1995 (Araman and others 1997, Hager and others

1998). Discarding these pallets can impact a community because more land is needed

to accommodate the pallets and more money is needed to destroy them. Forest resources are also affected when wooden pallets are destroyed because more timber is

needed to manufacture new pallets and other wood products.

Operational and financial feasibility studies indicate that valid opportunities exist for

private and public business projects that recover discarded pallets (Araman and others

1998). The Pallet Recovery Opportunity Analysis Computer Tool (PROACT) is a userfriendly computer tool that assesses the operational and financial feasibility of potential

pallet recovery projects. PROACT is an appropriate acronym because pallet recovery

operations proactively address a number of important issues. First, processing discarded pallets reduces landfill requirements and offers communities an opportunity to

generate new revenues that offset landfill costs. Second, reclaiming pallet parts for use

by the wooden pallet and other wood products industries provides the opportunity to

reduce the demand for new lumber. Third, using recovered pallet wood to manufacture

value-added products, such as strip wood flooring, paneling, or even furniture, offers

local communities an opportunity to create jobs. It also offers the innovative forestbased products entrepreneur an opportunity to develop a profitable business venture.

In PROACT, user supplied information describing the proposed operational plan and

key cost and revenue forecasts are used to simulate operations and cash flows.

PROACT can also be used to compare various scenarios of the same project. The effect

of user input changes are instantly reflected in the feasibility study results. Whether

evaluating a basic pallet disassembly project at a local landfill, or a complex pallet

removal, pallet-part reclamation, and strip wood flooring business venture, PROACT is

a valuable tool. PROACT satisfies the need for a pallet recovery analysis program that

evaluates potential projects using project specific information.

The feasibility of any pallet recovery project depends on a variety of factors: quantity,

quality, and types of pallets recovered or received; sales price estimates for products

produced; equipment and building needs; cost forecasts; operational plans; and cost of

capital and tax rates.

By following this guide, users will learn to evaluate potential projects by entering

information that addresses these factors into PROACT.
2

Arrangement of this

User’s Guide

PROACT is contained in a Microsoft® Excel® file named proact.xls. It is an Excel®

workbook with three worksheets: inputs, reports, and model. This guide discusses the

information requested in the Inputs worksheet and the interpretation of the output in the

Reports worksheet. Detailed tables contained in the Model worksheet may be useful to

some users. However, the Model worksheet is easy to understand and is not covered in

this guide.

This guide is arranged to facilitate the following activities:

• installing the file

• understanding the concept of workbooks, worksheets, and cells

• inputting the requested information

• interpreting the results

• referencing pertinent literature

• understanding terms

• finding information quickly.

To increase user comprehension, an example project is illustrated, terms are defined,

and sidebars are inserted throughout this guide.

Getting Started

Hardware and

Software Requirements

PROACT was designed for Microsoft® Excel® 97; however, it will run on more recent

versions of Excel®. It is also compatible with Macintosh® versions of Excel®. It is

compatible with the Microsoft® Windows® 95, Microsoft® Windows® 98, and

Microsoft® Windows® 2000 operating systems. It is also compatible with recent

Macintosh® operating systems.

User Requirements Any user should find PROACT easy to use, even those unfamiliar with Microsoft®

Excel®. However, a basic guide to Microsoft® Excel® may be helpful to some users.

Many guides are available, including those that focus on using Microsoft® Excel® in the

natural resource profession (Fuller and others 1997).

Installation Downloading from the Internet—PROACT can be downloaded at the following Web

site: www.srs4702.forprod.vt.edu. If Internet access is unavailable, contact Philip A.

Araman, USDA Forest Service, Southern Research Station, Brooks Forest Products

Center, Virginia Polytechnic Institute and State University, 1650 Ramble Road,

Blacksburg, VA 24060 [(540) 231-5341] or A.L. Hammett, Center for Forest Products

Marketing and Management, Virginia Polytechnic Institute and State University,

1650 Ramble Road, Blacksburg, VA 24061 [(540) 231-2716]. The program developer,

E. Bradley Hager, can be contacted online at HAGERBRAD@aol.com. Comments

and recommendations for future projects are appreciated.

Installing from a diskette—To start PROACT, use the File-Open menu option within

Microsoft® Excel®. Open the file named proact.xls located on the diskette. To improve

the performance of PROACT and protect the original diskette, use the File-Save As

menu option in Microsoft® Excel® to save PROACT to the hard drive and store the

original diskette in a safe place.
3

Overview When the user opens PROACT, one of the three worksheets will appear on the opening

Microsoft® Excel® screen: Inputs, Reports, or Model. The worksheets appear to lie on

top of each other in a workbook. Three worksheet tabs are located at the bottom of the

screen. Using the mouse pointer, the user may select a tab to bring the desired

worksheet onto the screen.

The three worksheets in the PROACT workbook contain a number of sections. Each

section contains tables, and the Reports worksheet also displays charts. Each table

contains green, red, and white cells. Green cells are the only cells in which the user can

input information. Red and white cells contain labels or formulas and cannot be

modified by the user.

The user will notice that the cells in each of the PROACT worksheets already contain

information. This information is the example as illustrated in this guide. The user can

again use the File-Save As menu option and rename the file for a specific project. The

user can then work directly on the renamed file and the original file will serve as the

master file. The user can move among cells using the arrow keys (the Enter key will

move the user down one cell). The simplest form of the information may be input and

PROACT will provide the correct format. For example, a user may enter March 22,

2000 and when the arrow key is pressed, the date will be input as 22-Mar-00. Moreover, the user does not need to enter units; PROACT will automatically enter the correct

units for a given cell.

To differentiate between tables with the same numbers in this guide, inputs modifies all

tables described for the Inputs worksheet, report modifies all tables described for the

Reports worksheet, and chart modifies all tables associated with charts in the Reports

worksheet. The tables in the Excel® worksheets will not include these modifiers.

Workbooks, Worksheets,

and Cells

A workbook is a collection of worksheets. The use of multiple worksheets helps

organize the workbook. Worksheets are composed of rows and columns. A cell is

formed at each row-column intersection. Cells are the basic building block of a

spreadsheet. Each cell has a unique address that allows a formula in one cell to reference the information contained in other cells. In PROACT, the green cells are user input

cells and are the only cells in which the user can modify information.

Inputs Worksheet The Inputs worksheet allows the user to enter information depicting a specific project.

This information includes forecasts and estimates of key factors such as product selling

prices and cost rates. The 11 sections (Roman numerals on the worksheet) of the Inputs

worksheet follow.

I. Title Information and

I. Basic Financial Inputs

Inputs worksheet table 1 requests two types of information. The first half of the table

covers the basics: Who is the client; who is the analyst; what is the date; and what is the

project called? There is a tendency to skip these cells; however, a moment spent now

Input Worksheet Table 1. Basic title and financial inputs

Client name: PROACT Guide Cost of capital 12.00%

Analyst name: Hager, Araman, Hammett Real business tax rate 40.00%

Date: Project life (no. years) 5

Project label:
4

can save time later when comparing projects or when revisiting results at a later date.

The second half of Inputs worksheet table 1 requests the basic financial parameters

required for profitability analysis. These inputs greatly impact the estimate of project

profitability.

If the firm is using internal funds or if an investor is using personal funds, the cost of

capital is the typical rate of return that would be received by investing the money in

another project with similar risk. Estimating the cost of capital can be quite complicated. The user may consult an expert, such as a banker or an accountant, to obtain a

reasonable cost of capital estimate. Section XI, however, provides the basic tools

needed to calculate the weighted average cost of capital.

Forty percent is a generic real business tax rate often used in cash flow analyses. A

local accountant, banker, or financial advisor is a good source for the combined tax rate

one can expect to pay. A tax incentive by any level of government lowers the real

business tax rate. A reduction in the tax rate can affect the feasibility of a project.

The number of years planned for the project life can range from 1 to 10 in this computer tool. Many Inputs worksheet tables throughout the model will accept estimates

for each of the first 5 years of a project. Inputs for years exceeding the project life will

be ignored. Years beyond year 5 use the year-5 estimate.

II. Product Pricing The objective of this section is to obtain sales price estimates for each of the project’s

services and products. PROACT is designed for use on a project that provides receiving

and removal services for discarded pallets and the following products: reclaimed whole

pallets, reclaimed pallet-part stringers, half stringers cut to length, reclaimed pallet-part

deckboards, and two types of hardwood flooring manufactured from used deckboards.

The project need not offer all the services and products listed. PROACT can be used for

any mix of these products. The mix of services offered and products actually produced

is addressed in section III.

The sales price referred to in this section is the price the project charges the next

member in the production process, the marketing chain, or both. For example, if the

project sells wood flooring to a distributor for $2 per square foot and the distributor

sells the flooring to a retailer for $2.25, the sales price requested by PROACT for the

project is $2 not $2.25. Marketing channel design and its effect on sales price and

marketing cost are discussed in section VII.

Inputs worksheet table 2 accepts tipping fee estimates for years 1 through 5. Two types

of tipping fees are present in the table: pickup fees and drop-off fees. Pickup fees are

higher because the pallet recovery project actually removes the discarded pallets from a

client’s location. The project charges drop-off fees when a client transports the discarded pallets to the project’s receiving yard.

Table 2. Pallet Removal Tipping Fees ($/Ton) Year

1 2 3 45

Pickup $45.00 $45.00 $45.00 $45.00 $45.00

Drop-off $35.00 $35.00 $35.00 $35.00 $35.00
5

Tipping fees can be charged on a per-pallet basis. In PROACT, the per-pallet rate

actually charged by the project must be converted to a per-ton rate before it is entered

into Inputs worksheet table 2. For example, if the per-pallet rate is $1 per pallet and

there are approximately 40 pallets per ton, the per-ton tipping fee rate is $40.

Inputs worksheet table 3 accepts price estimates for whole pallets for years 1 through 5.

Estimates may be input for four different pallet types, which are defined in section III.

By defining pallet types, price estimation should be more accurate. In the example

project, only one pallet type has been defined in section III; therefore, only one pallet

type is presented in this table.

Inputs worksheet table 4 accepts price estimates for stringers obtained from each pallet

type. An extra column in this table allows input on half stringers. Half stringers are cut

from damaged stringers that would otherwise be discarded. Half stringers can also be

cut from odd size stringers that may be difficult to market.

Deckboard price estimates are entered in Inputs worksheet table 5.

In Inputs worksheet table 6, the user may enter price estimates for rustic wood flooring

and clear wood flooring. Rustic in this case could refer to unfinished flooring and clear

could refer to finished flooring.

In Inputs worksheet tables the abbreviation for square foot is ft^2.

Table 3. Whole Pallet ($/Pallet) Pallet Type

Year Type 1 Type 2 Type 3 Type 4

1 $4.50

2 $4.50

3 $4.50

4 $4.50

5 $4.50

Table 4. Pallet Part-Stringer ($/Stringer) Stringer From Pallet Type

Year Type 1 Type 2 Type 3 Type 4 Half Stringer

1 $0.50 $0.15

2 $0.50 $0.15

3 $0.50 $0.15

4 $0.50 $0.15

5 $0.50 $0.15

Table 5. Pallet Part-Deckboard Deckboard From Pallet Type

Year Type 1 Type 2 Type 3 Type 4

1 $0.20

2 $0.20

3 $0.20

4 $0.20

5 $0.20

Table 6. Flooring ($/Ft^2) Year

1 2 3 45

Rustic $2.30 $2.30 $2.30 $2.30 $2.30

Clear $1.90 $1.90 $1.90 $1.90 $1.90
6

III. Pallet Acquisition,

III. Processing, and Flooring

III. Manufacture

The flow of discarded pallet materials into, through, and out of the operational system

of the project can become complicated. Figure 1 is a simplified flow chart for the

example project. The more pallet types defined in the program the more complicated

the flow of materials. A separate flow chart like the one in figure 1 will exist for each

pallet type.

Graphics labeled as figures are not generated by PROACT. Those labeled as charts are

generated by PROACT and appear in the Reports worksheet.

Inputs worksheet tables 7 through 13 are designed to break the system of material

processing into a series of steps or decision points. Each table collects information

about one step in the system. This allows the user to enter more reliable and detailed

information about plans and estimates.

Table 7. Defining Incoming Pallet Types

(DB=Deckboards)

Average

Percent of Width No. 1 Number of Width No. 2 Number of DB Deckboard Number Stringer Stringer

Pallet Incoming Size DB No. 1 Size Size DB No. 2 Size Length Weight Stringers Weight Length

Category Pallets (Inches) per Pallet (Inches) per Pallet (Inches) (Pounds) per Pallet (Pounds) (Inches)

Type 1 100% 6 4 4 8 40 3 3 5.5 48

Type 2 1 1 1 1 1 1 1 11

Type 3 1 1 1 1 1 1 1 11

Type 4 1 1 1 1 1 1 1 11

100%

Should Equal 100% NOTE: DO NOT ENTER ZEROS ABOVE

Half Stringer 24 EXCEPT ON % INCOMING PALLETS

 (Inches) IF NECESSARY. USE THE NUMBER 1 AS A PLACE HOLDER.

Color Key

Red = Revenue Generating Activity

Blue = Operation

Yellow = Disposal Activity

Figure 1—Material flows for the example project. (Figure is not generated by PROACT.)

Receive Pallet Drop-off with Fee

Sell Whole Pallet

Sell Half Stringer

Cut to Half Stringer Size Dispose or G rind W ood Sell Stringer

S trin gers

Sell Clear Flooring Sell Rustic Floorin g Dispose or Grind W ood

Manu facture Floorin g

Dry Deckboard

Select Deckboard for Flooring Sell Deckboard Dispose or Grind W ood

Deckboards

Deckboards

Disassem b le Pallets Dispose or G rind W ood

Total W hole Pallets Received

Pick-up Pallet with Fee Receive P allet with No Tipp ing Fees
7

Table 8. Projected Number Incoming Pallets Year

1 2 3 45

Total No. Pallets Per Week 1650 1850 2050 2250 2450

Percent W/Pickup Tip Fees 60% 60% 60% 60% 60%

Percent W/Drop-off Tip Fees 40% 40% 40% 40% 40%

Percent W/O Tip Fees

100% 100% 100% 100% 100%

Table 10. Stringer Processing

Type 1 Type 2 Type 3 Type 4

Percent of Stringers Resell 75%

Percent Sell as Half Stringers 10%

Percent of Stringers Dispose 15%

100%

Table 11a. Processing Deckboards

Year 1

Type 1 Type 2 Type 3 Type 4

Percent Deckboards Resell 65%

Percent Deckboards Dispose 15%

Percent Deckboards for Flooring 20%

100%

Table 12a. Processing Deckboards into Flooring Types

Year 1 Type 1 Type 2 Type 3 Type 4

Percent Deckboards for Rustic 60%

Percent Deckboards for Clear 40%

100%

Table 13. Yield From Deckboard (ft^2) to Flooring (ft^2)

Type 1 Type 2 Type 3 Type 4

Deckboard to Rustic Flooring 60%

Deckboard to Clear Flooring 40%

Table 9. Whole Pallet Processing Type 1 Type 2 Type 3 Type 4

Percent of Incoming Pallets Resell As Is 10%

Percent of Incoming Pallets Dispose 10%

Percent of Incoming Pallets Disassemble 80%

100%
8

Pallet types coming into the facility are defined in Inputs worksheet table 7. Each row

collects information on one type of pallet received. The first column, Percent of

Incoming Pallets, is asking the following question: Of all the pallets received what

percent will be of this type? The red cell at the bottom of this column is a check cell.

Because pallet types 1 through 4 should represent all pallets received, the check cell

value (red colored) should equal 100 percent. Check cells are used throughout the

Inputs worksheets.

The other columns in this table collect information on the physical dimensions of each

pallet type. These inputs give the computer model a quantified image of each pallet

type. This image is used extensively in the model. Half-stringer length is requested in a

cell beneath the main portion of the table. It is assumed that all half stringers will be cut

to the same length regardless of the original stringer size.

The expected number of incoming pallets and the percent with and without tipping fees

are entered into Inputs worksheet table 8. The number of incoming pallets is the

average weekly number of pallets received from all sources.

In Inputs worksheet tables 9 through 13, estimates are required for each type of pallet

defined in Inputs worksheet table 7. In Inputs worksheet table 9, the user estimates

what will be done with the discarded whole pallets received. There are three possible

actions: resell the pallet as is, dispose of the pallet, or disassemble the pallet. Estimates

may vary for different pallet types. For example, standard size pallets may be relatively

easy to market if they are in acceptable condition. However, a less common type of

pallet may be impossible to market regardless of its condition.

The user estimates the processing plan for stringers produced when pallets are disassembled in Inputs worksheet table 10. The user has three options: resell stringers, cut

stringers to half stringers and resell, or dispose of stringers.

Table 11a is a representation of tables 11b through 11e, which are in the computer

program. In Inputs worksheet tables 11a through 11e, the user estimates how

deckboards obtained by disassembling pallets will be used. The project may resell

deckboards, dispose of deckboards, or use deckboards to manufacture flooring. Input is

entered in a separate table for each of the first 5 years of the project.

Multiphase projects and Inputs worksheet tables 11a through 11e—Some projects

may consist of more than one phase. For example, the project manager may plan only

to resell pallets, reclaimed deckboards, and reclaimed stringers during the first 2 years.

In year 3, however, the developer may intend to begin manufacturing strip flooring

from deckboards. Using separate tables for years 1 through 5, PROACT simulates this

two-phase scenario. In another example, the project developer plans to manufacture

flooring from year 1; however, an increase in the manufacturing of flooring is planned

as the market develops. Using separate tables for years 1 through 5, the user can input

this information.

The user estimates what percentage of deckboards will be used for the manufacture of

rustic wood flooring and clear wood flooring for the first 5 years of the project in

Inputs worksheet tables 12a through 12e. The input in these tables should only apply to

deckboards already selected for flooring manufacture. The sum of the cells in each

column in the first five tables should equal the 100 percent in the check cells.
9

The value-added product mix and Inputs worksheet tables 12a through 12e—A

separate table for each of the first 5 years of the project allows the user to represent an

operational strategy. For example, the user may intend to manufacture only clear

flooring until the market for rustic flooring can be developed. In this case, the percent

of deckboards used for the manufacture of clear flooring would be greater in the first

year of the project than in later years.

Inputs worksheet table 13 requires a yield estimate. In this case, the yield is the percent

of the square footage of deckboards initially selected for flooring manufacture that

actually become flooring. For example, if 50 square feet of flooring are produced for

every 100 square feet of deckboard material, the percent yield is 50 percent. The yield

estimate recognizes that some deckboard material will be lost in both the drying and

manufacturing stages of flooring production. A separate yield estimate is required for

rustic flooring and for clear flooring. The terms rustic and clear can represent any type,

species, or grade flooring the project plans to manufacture. For example, the firm may

plan to manufacture unfinished and finished strip flooring as opposed to rustic and

clear flooring.

IV. Labor Inputs worksheet table 14 enables the user to specify the project’s planned labor

requirements throughout the life of the venture. The user can represent a constant labor

force or a labor force that gradually increases or decreases. The user also can specify an

abrupt change in labor requirements that often occurs in multiphase projects. The two

input cells above the main table must be completed with the number of workweeks in

the year and the rate adjustment factor.

The wages paid to workers are seldom equal to the total labor cost to the employer.

Worker compensation is one example of the extra costs of labor to the employer. In

hazardous occupations, such as forest harvesting, the cost of insurance may greatly

increase the cost of labor. The rate adjustment factor is a straightforward method to

Table 14. Labor Requirements

Number Work Weeks in Year 50

Rate Adjustment Factor 1.5 Year

Number 1 2 34 5

Number Job Title Personnel Pay Rate/Hr Hrs/wk. Hrs/wk. Hrs/wk. Hrs/wk. Hrs/wk.

1 Opns Mgr. 1 $17.00 40 40 40 40 40

2 Bus Mgr. 1 $14.00 40 40 40 40 40

3 Truck Driver 2 $9.00 40 40 40 40 40

4 Driver Asst. 1 $7.00 40 40 40 40 40

5 Disassembler Tech. 1 $8.50 40 40 40 40 40

6 Disassembler Tech. 1 $8.50 40 40 40 40 40

7 Disassembler Tech. 1 $7.50 20 20 20 20 20

8 Disassembler Tech. 1 $7.50 20 20 20 20 20

9 Cut-Off Saw 1 $7.50 20 20 20 20 20

10 Rip Saw 1 $8.50 20 20 20 20 20

11 Rip Saw 1 $7.50 20 20 20 20 20

12 Molder 1 $9.50 40 40 40 40 40

13 Molder 1 $7.50 20 20 30 30 30

14 Sorter/Shipping 2 $7.00 40 40 40 40 40

15 Trim Saw 1 $7.50 40 40 40 40 40

16 Fork Lift Operator 1 $7.50 40 40 40 40 40

17

18

19

20
10

account for the total per hour labor cost to the project. A common rate adjustment factor

for project planning is 1.5. A less hazardous project may have a smaller factor and a

more hazardous type project may have a higher factor. The user should not underestimate the labor cost because it usually has a great impact on the profitability estimation.

The main portion of Inputs worksheet table 14 consists of eight input columns. The first

three input columns are self-explanatory. The last five input columns require an estimate

of the number of hours each employee will work each week during years 1 through 5.

The user should note that two truck drivers are indicated in row number 3 of the

example project. The hours per week estimates are for each truck driver, not the

combined hours of both drivers. If the drivers are not expected to work the same

number of hours per week, each driver should be listed on a separate row in the table.

For example, the disassembler technician in row number 6 works full time and the

disassembler technician in row number 7 works part-time. In addition, if the workers

have the same job titles and their pay rates differ, they should be listed on separate rows.

V. Facility and Transportation

V. Costs

Expected facility costs, such as building lease payments and monthly utilities, are

entered into Inputs worksheet table 15. Utility costs for gas, electric, water, and other

utilities are each estimated separately on the next four rows of the table. The last two

rows in Inputs worksheet table 15 include a miscellaneous (other) row and a facility

and equipment maintenance row. Leased equipment and facilities should be entered in

the other row. While the example project forecasts the costs in Inputs worksheet table

15 to remain constant over the 5 years of the project life, changes can result from

increases in rates or from increases in production volumes. Separate columns are

provided for each of the first 5 years to reflect these changes.

Purchasing facilities rather than leasing—Facilities, such as warehouses and

manufacturing buildings, might be purchased rather than leased. If facilities are

purchased, the amount should be entered into Inputs worksheet table 21 in section VIII.

Purchased facilities should also be entered as a depreciable asset in Inputs worksheet

table 22 in section IX.

Table 16a is a representation of tables 16b through 16c, which are in the computer

program. Inputs worksheet tables 16a through 16c and 17 address transportation costs.

In the example project, transportation costs refer only to the cost of transporting

discarded pallets to the project’s receiving yard and the cost of moving wood waste to

local landfills. In this example, the final product will be distributed as freight on board,

and the project will only bear the cost of loading the product on a commercial carrier.

Table 15. Facility Costs (Monthly) Year

1 2 34 5

Lease/Month $1,875.00 $1,875.00 $1,875.00 $1,875.00 $1,875.00

Insurance/Month $200.00 $200.00 $200.00 $200.00 $200.00

Utilities/Month Gas $800.00 $800.00 $800.00 $800.00 $800.00

Electric $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00

Other

Water $100.00 $100.00 $100.00 $100.00 $100.00

Other

Maintenance/Month $100.00 $100.00 $100.00 $100.00 $100.00
11

Assuming distribution costs—The project may distribute its products or ship via a

commercial carrier. If project trucks will be used for distribution, the user would enter

the cost of the trucks in table 16. If a commercial carrier will be used, the user would

enter shipping costs into Inputs worksheet table 19 next to Shipping/Packaging in

section VII.

Inputs worksheet tables 16a through 16c are identical and allow the user to input

information about different types of trucks. For example, if the project is using one

large truck and two small trucks, information about the large truck would be entered in

Inputs worksheet table 16a, and information about the two small trucks would be

entered in Inputs worksheet table 16b. Because only one truck is used in the example

project, Inputs worksheet tables 16b and 16c are not completed.

In the example project, only one truck is required and it is leased from a rental agency.

Renting simplifies operations because the rental agency is responsible for maintenance.

Also, when a truck breaks down, the rental company will provide a replacement truck

while the original truck is repaired.

Inputs worksheet table 17 requests information about monthly maintenance costs for all

trucks and can be left blank if the trucks are leased and the leasing company will

maintain them. If trucks are purchased, the project must allocate funds for maintenance. All purchased trucks should be listed in Inputs worksheet table 21 in section

VIII and in Inputs worksheet table 22 in section IX if they can be depreciated.

VI. Wood Waste Disposal Costs The user enters costs or revenues into Inputs worksheet table 18 based on whether the

project must pay to dispose of wood wastes (costs) or the project can sell its wood

Table 16a. Transportation Costs (Monthly)

Year

Truck Type 1 (Monthly) 1 2 3 4 5

No. Trucks This Type 1 11 1 1

Truck Lease/Month/Truck $260.00 $260.00 $260.00 $260.00 $260.00

Lease Mileage Cost per Mile/Truck $0.10 $0.10 $0.10 $0.10 $0.10

Insurance/Month/Truck $100.00 $100.00 $100.00 $100.00 $100.00

Miles per Gallon 8 NEVER LEAVE ZERO

Fuel Cost/Gallon $1.20 $1.20 $1.20 $1.20 $1.20

Monthly Mileage per Truck 4585 4585 4585 4585 4585

Total Monthly Mileage Estimate 4585 4585 4585 4585 4585

Table 17. Other Monthly Costs for All Trucks Year

 (Monthly) 1 2 34 5

Maintenance

Other

Table 18. Wood Disposal Costs of Revenues ($/Ton)

Costs: enter positive numbers 

Revenues: enter negative numbers Whole Parts and

Pallets Scraps

1 ($10) ($10)

2 ($10) ($10)

YEAR 3 ($10) ($10)

4 ($10) ($10)

5 ($10) ($10)
12

wastes (revenues). Wood waste disposal costs refer to the cost of disposing of pallets

too damaged to process and wood scraps created during the reclamation of pallet parts

and the manufacture of flooring. These costs include waste-handling costs and the

tipping fees charged by landfills or by firms with wood grinders; they are not the costs

associated with transportation. Landfills tend to charge higher rates for whole pallets

than for disassembled pallets or general wood waste. Some landfills will not accept

whole pallets. Inputs worksheet table 18 accepts separate rate estimates for whole

pallets in one column and pallet parts and general wood waste in the second column.

Costs of disposal are entered as positive numbers in Inputs worksheet table 18. If the

project developer intends to sell the wood waste to other firms (example project),

revenues are generated. Revenues from disposal are entered as a negative number in

Inputs worksheet table 18.

Selling wood wastes (entering negative numbers into Inputs worksheet table 18)—

In some situations revenues are generated by the sale of wood wastes. In the example

project, wood waste will be sold to local firms for use as fuel. Because the example

project expects to receive $10 per ton for wood waste, a negative 10 is entered into

Inputs worksheet table 18. Selling wood waste increases the project’s overall wood

recycling volume and generates additional revenues.

VII. Marketing and Management

VII. Costs

Inputs worksheet table 19 addresses marketing costs such as shipping and packaging.

Two additional rows are provided for other types of marketing costs not listed.

Marketing channels—The marketing costs the manufacturer (the project) incurs and

the price the manufacturer receives for products are related to the marketing channel

design adopted. Case A in figure 2 represents the design chosen by the example project

for recycled wood flooring. The proposed project may plan to perform the numerous

channel functions required to market the product. Marketing channel functions include

promotion, advertising, physical transportation, warehousing, and packaging. Excluding the end consumer, there are only two channel members in case A, which means the

manufacturer must perform any channel function not performed by the retailer.

Generally, the more functions a channel member performs or the more value the

channel member adds to the product, the greater price that member can demand from

the next channel member. However, performing more functions also increases the

manufacturer’s marketing costs.

At first glance, case A appears to be the most profitable because the product is being

sold directly to the retailer. However, sometimes a channel with many members is

actually more efficient than a channel with few members. Greater channel efficiency

can mean greater net revenues and a stronger competitive position for the manufacturer.

In the longer marketing channel depicted in case B, one processing firm could glue

individual flooring strips together to form flooring panels. Another processing firm

could sand, stain, and apply a finish to the flooring panels. The additional members of

Table 19. Marketing Costs (Yearly) Year

1 2 3 45

Shipping/Packaging $12,000 $12,000 $12,000 $12,000 $12,000

Promotions/Advertising $15,000 $15,000 $15,000 $15,000 $15,000

Personal Sales Expenses $5,000 $5,000 $5,000 $5,000 $5,000

Other

Other
13

the marketing channel add more value to the final product, which could also lead to a

stronger competitive position for the manufacturer.

The user inputs basic management and administrative costs, such as legal, accountant,

and licensing fees, in Inputs worksheet table 20. Two additional rows are provided for

additional administrative costs or expenses.

VIII. Equipment and

VIII. Facility Purchases

In Inputs worksheet table 21, the user enters the equipment and facility purchases and

their costs. PROACT was designed primarily for projects where the majority of

equipment is purchased as opposed to renting or leasing. Rented or leased equipment

should be entered into Inputs worksheet table 15 in section V.

The basic operating system for the example project is depicted in figure 3. The equipment names, quantity, and cost (including installation and year purchased) are entered

into Inputs worksheet table 21. Note that if an asset is purchased at the beginning of the

project, the user enters a zero. Zeros are recognized by PROACT but are not displayed

on the screen.

Table 20. Management Costs (Yearly) Year

1 2 34 5

Legal Fees $1,000 $1,000 $1,000 $1,000 $1,000

Accountant Fees $1,000 $1,000 $1,000 $1,000 $1,000

Licenses $200 $200 $200 $200 $200

Trade Association Expenses $1,000 $1,000 $1,000 $1,000 $1,000

Employee Training $5,000 $5,000 $5,000 $5,000 $5,000

Other

Equip Maint/Blade Sharpening

Figure 2—Potential marketing channel

designs. (Figure is not generated by

PROACT.)

End Consumer

Retailer

M anufacturer

(Project)

Case A

End Consumer

Retailer

Distributor

Processing Firm

Processing Firm

M anufacturer

(Project)

Case B
14

Pallet Parts Flooring

Shipping

Strap to Pallet

Stringers & Deckboards

Shipping Storage

Bundle by Grade

Sort & Grade

Moulder

Rip Saw

Cut-Off Saw

"Hot Box" Drier

Air-Dry Shed

Deckboards

Sorting

Disassembler

Figure 3—Production flow

diagram. (Figure is not generated

by PROACT.)

Table 21. Equipment and Facility Purchases

Name Quantity Cost w/Install.

Year (0-10)

Purchased

(0=Initial) Total Cost

Pallet Disassembler 1 1 $9,000 $9,000

Pallet Disassembler 2 1 $9,000 $9,000

P. D. Blades 60 $37 $2,220

Cut-off Saw 1 $10,000 $10,000

Cutt-off Saw Blades 5 $100 $500

Rip Saw 1 $14,000 $14,000

Rip Saw Blades 6 $100 $600

Double Trim Saw 1 $7,000 $7,000

Trim Saw Blades 5 $100 $500

Molder 1 $24,000 $24,000

Pallet Jack 1 $400 $400

Forklift 1 $8,000 $8,000

Hot Box Dryer 1 1 $4,000 $4,000

Hot Box Dryer 2 1 $4,000 $4,000

Hot Box Dryer 3 1 $4,000 $4,000

Hot Box Dryer 4 1 $4,000 $4,000

Steel Band Strapper 1 $400 $400

Poly Strapper 1 $50 $50

Air Dry Shed 1 $3,500 $3,500

Sorting Boxes 1 $500 $500

Misc. Supplies 1 $5,000 $5,000

Conveyors 1 $10,000 $10,000

Computer System 1 $3,200 $3,200
15

IX. Depreciation The depreciation of assets can have a substantial effect on cash flow analysis. This is

particularly true of manufacturing projects that require large capital asset investments.

In PROACT, the user enters each depreciable asset and its purchase and installation

costs into Inputs worksheet table 22.

The user also inputs the actual salvage value of the asset at the end of the project. This

is seldom equal to the book value of an asset. The depreciation class is entered as the

number of depreciable years prescribed for the type of asset. The user also enters the

year of purchase for cash flow analysis. If a depreciable asset is purchased at the

beginning of the project, the user enters a zero.

The Modified Accelerated Cost Recovery System is used to calculate the depreciation

schedule in this computer model. This system should yield a reasonable estimate of

depreciation; however, this computer model only estimates depreciation. The rules

covering depreciation and the various methods by which to compute depreciation are

quite complex. An accountant can provide expert advice in the selection of depreciation

methods.

X. Net Working Capital

X. and Deposits

Inputs worksheet table 23 addresses the initial deposits that may be required from the

project before operations begin. PROACT enters information (red cells) about monthly

costs from previous tables and the user enters the number of months the initial deposits

must cover. PROACT then calculates the totals for each category. In addition to the

basic categories listed, the user can input information about other categories that

require initial deposits.

In Inputs worksheet tables 24a through 24f, PROACT addresses the net working capital

requirements of the project. Typically, the cost to operate a project and manufacture

products is incurred before revenues from those products can be collected.

Table 22. Depreciable Assets

Act. Salvage Class 1,3, Year

Equip. Install. Value at End 5, 7, 10,15 Purchased

Asset Title Cost Cost of Project Life or 20 years (0-10)

Air Shed $3,500 $1,000 15

Pallet Disassembler $8,500 $500 $1,000 5

Pallet Disassembler $8,500 $500 $1,000 5

Double Trim

S

$7,000 $2,000 5

Rip Saw $14,000 $5,000 5

Molder $24,000 $10,000 5

Forklift $8,000 $5,000 5

Dryer 1 $3,500 $500 $500 5

Dryer 2 $3,500 $500 $500 5

Dryer 3 $3,500 $500 $500 5

Dryer 4 $3,500 $500 $500 5

Cut-off Saw $10,000 $2,000 5

Conveyer $9,000 $1,000 $2,500 5

Computer

S

$3,000 $200 1

Table 23. Initial Deposits Monthly Rate No. Months Cost

Building Lease $1,875 6 $11,250

Insurance-Building $200 6 $1,200

Truck Leases $260 6 $1,560

Insurance-Trucks $100 6 $600

Other

Other

Other
16

PROACT uses monthly cost information from previous sections (red cells). The user

then indicates the number of lease payments (or months) of capital desired for net

working capital. The number of months selected should represent the time required to

collect revenues, plus a safety period.

Tables 24a and 24f are representations of tables 24b through 24e, which are in the

computer program. In some categories in Inputs worksheet table 24, such as petty cash

(Inputs worksheet table 24f), a monthly cost has not been provided in previous tables.

Therefore, both the monthly amount and the number of months must be entered. Both

the monthly amount and number of months are also required in the other category

(provided to cover categories not addressed by PROACT).

In Inputs worksheet table 25, the user can estimate additional deposits and net working

capital requirements that may arise later in the project. For example, if a project plans

to double manufacturing capacity in year 5, additional funds, i.e., for new equipment to

increase production, will probably be required.

XI. Optional Tools

XI. (Weighted Average Cost

XI. of Capital Calculator)

The weighted average cost of capital calculator (WACC) is one method commonly used

to estimate a project’s cost of capital. Inputs worksheet tables 26 through 29 provide

some tools that can be used to calculate the WACC. Accountants, bankers, or financial

advisors are good sources for a reasonable cost of capital estimate. However, Inputs

worksheet tables 26 through 29 will calculate the WACC if the user knows the project’s

planned capital structure, cost of debt, and required rates of return on common and

preferred equity.

Inputs worksheet table 26 calculates the weighted average cost of debt. The table contains

three input columns. The data in these columns are used to calculate the weighted

average interest rate. The weighted average cost of debt is calculated by adjusting the

weighted average interest rate to account for the tax benefit of debt financing.

Table 24. Initial Net Working Capital

Table 24a. Building and Facilities Monthly No. Months Cost

Building Lease $1,875 6 $11,250

Insurance Building $200 6 $1,200

Gas $800 6 $4,800

Electric $1,000 6 $6,000

Other Utilities

Water $100 6 $600

Other

Maintenance $100 6 $600

Table 24 f. Other New Working Capital Monthly No. Months Costs

Petty Cash $500 6 $3,000

Marketing and Mgt. $3,350 6 $20,100

Other

Other

Table 25. Additional Deposits and Net Working Capital

Year

1 2 3 4 5 6 7 8 9 10

Deposits

Net Working Capital

Total
17

In Inputs worksheet table 27, the user enters estimates for the cost of debt, the required

rate of return for common equity, and the required rate of return for preferred equity. If

Inputs worksheet table 26 is used, the weighted average cost of debt should be used for

the cost of debt estimate. If common or preferred stock or both are issued to help

finance the project, the required rate of return estimates should be available from the

issuing agency. Otherwise, a financial expert, such as a banker, should be consulted.

The methods used to estimate the required rate of return for equity are beyond the

scope of this guide.

Personal investments and the WACC—Often in the case of the small firm, owners

provide a significant portion of the start-up capital. Personal investments can be treated

Table 27. Cost of Debt, Common Equity, and Preferred Equity

Cost of Debt If table 26 is used enter the weighted average cost of debt. 7.80%

If entering another number, ensure the tax benefit of debt is

considered where the Interest Rate is multiplied by (1-tax rate).

Required Rates of Return

Required Rate of Return Common Equity (Common Stock) 17.00%

Required Rate of Return Preferred Equity (Preferred Stock) 15.00%

Table 28. Capital Structure

Percent of

Source Capital

Debt 50.00%

Common Stock 30.00%

Preferred Stock 20.00%

Should equal 100% 100.00%

Table 29. WACC

Weighted Average Cost of Capital (WACC)= 12.00%

Table 26. Weighted Average Cost of Debt Calculator

Present Interest Rate Total Debt = $198,000

Loan No Lender Value Yearly-Nom. (PV/Tot Debt)*Int. Rate

1 A Bank $104,000 13.00% 6.83%

2 B Bank $47,000 11.00% 2.61%

3 C Bank $47,000 15.00% 3.56%

4 D Bank

5

6

7

8

9

10

Weighted Average Interest Rate 13.00%

Business Tax Rate 40.00%

Weighted Average Cost of Debt 7.80%
18

like common equity for WACC purposes. Personal investments by individuals that the

owners agree to give payback priority (repayment of equity before the owners recover

their personal investments) can be treated like preferred equity for WACC purposes. It

must be realized, however, that debt obligations always receive payback priority over

equity when a firm is dissolved.

Inputs worksheet table 28 asks the user for information about the project’s capital

structure. The capital structure for the example project is shown in this table.

Inputs worksheet table 29 reports the project’s WACC. The WACC for the example

project is 12 percent. If the user wishes to use the WACC estimate that is displayed in

Inputs worksheet table 29, the estimate must be entered manually into Inputs worksheet

table 1 in section I. The WACC estimate displayed in Inputs worksheet table 29 is not

automatically used by PROACT.

The Reports Worksheet The results of the feasibility study are presented in the Reports worksheet. The Reports

worksheet consists of three sections. Section I contains Report table 1—the Summary

Report. The Summary Report includes basic indices that measure the project’s performance in key areas. In Section II—Report tables 2 through 5 display revenues and net

cash flows by year, the flow of materials through the project by year, and a complete

cash flow analysis. In Section III, charts 1 through 7 and their accompanying tables

(chart tables 1 through 7) display the sensitivity of profits to changes in tax rates, cost

of capital rates, and various revenue and cost categories.

I. Summary Report The Summary Report (Report table 1) includes several performance measures. The Net

Present Value (NPV) and the Internal Rate of Return (IRR) indicate the project’s

profitability. A brief explanation of how to interpret each of these indices follows.

The NPV indicates the change in the firm’s net worth if a project is undertaken. If the

NPV is greater than zero, the net worth of the firm will increase. A positive NPV means

the project is profitable and a negative NPV means the project is not profitable. The

NPV also allows the comparison of different scenarios or different projects if they are

similar in magnitude and duration. Projects with different risk levels can be compared

using the NPV method because the cost of capital for each project accounts for risk.

The example project is profitable and should be undertaken.

Table 1. Summary Report

Client PROACT Guide Date:

Analyst Hager, Araman, Hammett Project

Net Present Value: $122,226 Tax Rate: 40.00%

Internal Rate of Return: 19.9% Cost of Capital: 12.00%

Initial Cost: -$396,818 Project Life (years): 5

This Project Reduces Discarded Pallet Wood Going Into Landfills by (Tons) 13,453

Tons Reduced to Fiber (Ground) 3,664

Tons Recovered for Solid Wood Products 9,789

Percent of Wood Received Recovered for Solid Wood Products 72.8%

Total Wages and Other Expenses for Employees Over Project Life $2,034,375

The Average Revenue Generated per Discarded Pallet (Excluding fiber products) $6.53
19

Comparing different projects using the NPV—Frequently, decisionmakers must

determine which of several projects is the most attractive. If profitability is the primary

selection factor, the NPV can be used. However, using the NPV to compare different

projects has some limitations.

The NPV can be used to compare projects if the projects are similar in magnitude. The

NPV does not report a rate of return; therefore, comparing projects of different sizes

may lead to misleading results. One project may appear more profitable than the other

but may require a much greater capital investment. In this case, the rate of return may

be greater for the project with the lower NPV.

In addition, projects should be similar in duration when using the NPV to compare

projects. Consider two projects with equal NPV estimates. They may seem equally

attractive; however, if one project lasts 10 years and the other lasts only 5 years, the

project with the shorter life would be more attractive.

Projects with different risk levels can be compared using the NPV. The risk of a project

is included in the cost of capital used to calculate the NPV. A riskier project will require

a higher cost of capital. Using a higher cost of capital will lower the NPV for the riskier

project and allow for a valid comparison to the lower risk project.

The IRR measures the return on investment in the project. For example, an IRR equal

to 20 percent can be interpreted to mean that for each dollar invested 20 cents will be

returned annually. In reality, 20 percent is closer to the average estimated annual return

over the life of the project. If the IRR method is used to decide whether to undertake a

project, a hurdle rate must be used.

Often the cost of capital is used as the hurdle rate. If the IRR is greater than the hurdle

rate, the project should be undertaken. The IRR can also be used to compare scenarios

or projects of similar magnitude and duration; however, different hurdle rates should be

used to compare projects with different risk levels. Because the IRR in the example

project is higher than the cost of capital, the project should be undertaken.

Setting hurdle rates lower than the cost of capital—In some cases, the hurdle rate

used to evaluate a project may actually be lower than the cost of capital. A certain

project may yield benefits that are not fully accounted for by cash flows. For example,

recycling may be viewed as an additional benefit to the community that is not reflected

in a project’s cash flows. For instance, a city commission may choose to lower the

standard hurdle rate in such a case. Another organization may recognize the value of

improved public relations if a certain project is undertaken. In these cases, the hurdle

rate may be set lower than the cost of capital to make the project acceptance-decision

rule less stringent.

Both the NPV and IRR are widely used to estimate the profitability of a project.

Managers tend to prefer the IRR method and academics prefer the NPV method.

Typically, more than one profitability measure is considered.

The initial cost of the project is also included in the Summary Report. This amount is

especially useful when the project consists of only one phase. The initial cost amount

on the Summary Report does not reflect additional capital requirements characteristic

of multiphase projects.
20

Next, the Summary Report presents the total tonnage of wood that escapes the landfills.

This estimate includes both wood recovered and used in solid wood products, and

wood used in wood fiber products (nonsolid wood). The tonnage of wood that is

reduced to fiber products is also presented.

The Summary Report also includes two measures of the project’s solid wood recycling

performance. First, the tonnage of pallet wood recovered and used in solid wood

products over the life of the project is calculated. Second, the tonnage of pallet wood

recovered and used for solid wood products is expressed as a percent of the total

tonnage of pallet wood received. This calculation is referred to as the solid wood

recycling efficiency. The overall recycling efficiency may actually be higher if additional wood waste is used for fuel or ground and sold as mulch or some related product.

The last two measures reported in this table are the total labor costs over the life of the

project and the average revenue generated for each wood pallet recovered. Total labor

costs are an estimate of the project’s contribution to the local labor market. The average

revenue generated includes the sum of revenues from tipping fees and solid wood

products divided by the total number of pallets recovered. It illustrates the economic

activity generated by recovering wood pallets for solid wood products.

II. Summary of Annual

II. Net Cash, Revenues,

II. and Material Flows

The tables (Report tables 2 through 5) in this section provide the user with information

about revenues, material flows, and cash flows. Each table can display up to 10 years of

data.

Table 2. Net Cash Flows and Gross Revenues

Year

1 2 3 4 5

Net Cash Flows $29,544 $74,356 $104,441 $140,725 $180,305

Gross Revenues: $538,533 $603,810 $669,086 $734,363 $799,640

Table 3. Revenues by Product Year

1 2 3 4 5

Tipping Fees $88,791 $99,553 $110,316 $121,078 $131,841

Whole Pallets $37,125 $41,625 $46,125 $50,625 $55,125

Stringers/Half Str. $77,220 $86,580 $95,940 $105,300 $114,660

Deckboards $102,960 $115,440 $127,920 $140,400 $152,880

Rustic Flooring $170,016 $190,624 $211,232 $231,840 $252,448

Clear Flooring $62,421 $69,988 $77,554 $85,120 $92,686

Table 4. Materials Flow Year

1 2 3 4 5

No. Pallets Received 82,500.0 92,500.0 102,500.0 112,500.0 122,500.0

Tons Wood Received 2,165.6 2,428.1 2,690.6 2,953.1 3,215.6

Tons Dispose or Recover Fiber 589.9 661.4 732.9 804.4 875.9

Tons Recovered Solid 1,575.8 1,766.8 1,957.8 2,148.8 2,339.8
21

Table 5. Cash Flow Analysis w Analysis Table

Cash Flows 0 1 2 3 4 5

Revenues 538,533 603,810 669,086 734,363 799,640Equipment and Facility Purchases (123,870)Deposits and Net Working Capital (272,948)Costs: Facility (48,900) (48,900) (48,900) (48,900) (48,900)

Marketing and Management (40,200) (40,200) (40,200) (40,200) (40,200)Disposal 5,899 6,614 7,329 8,044 8,759Labor (403,500) (403,500) (409,125) (409,125) (409,125)Transportation (18,075) (18,075) (18,075) (18,075) (18,075)

Depreciation (23,225) (36,268) (20,931) (12,652) (12,616)

Earnings before taxes 10,532 63,481 139,184 213,455 279,483Business taxes (4,213) (25,392) (55,674) (85,382) (111,793)

6,319 38,088 83,510 128,073 167,690

Add back depreciation 23,225 36,268 20,931 12,652 12,616After tax income 29,544 74,356 104,441 140,725 180,305Actual Salvage Value Assets 30,500Salvage Value Tax (8,596)Net Salvage Value 21,904Recovered NWC and Initial Deposits 272,948

Total Terminal Cash Flow 294,851Initial outlay (396,818)Net cash flows (396,818) 29,544 74,356 104,441 140,725 475,157Cost of Capital 12.00% Net Present Value (NPV) $122,226Present Value Cashflows exclude Initial Outlay $519,043.65 Internal Rate Return (IRR) 19.9%
22

Chart 2 as well as chart table 2 illustrates the sensitivity of NPV to changes in the cost

of capital. As the cost of capital decreases, the NPV increases. Because the cost of debt

contributes to the overall cost of capital, lowering the cost of debt increases the

project’s NPV. With this chart, the user can identify how changing the cost of debt and,

III. Sensitivity Analysis This section contains seven charts and their accompanying tables. Chart 1 as well as

chart table 1 illustrates the importance of each product or service to the project’s total

revenues.

Chart Table 1. Source of Revenues

Over Life of Project

Tipping Fees $551,578

Whole Pallets $230,625

Stringers/Half Str. $479,700

Deckboards $639,600

Rustic Flooring $1,056,160

Clear Flooring $387,769

Chart 1. Source of Revenues 

16%

7%

14%

19%

32%

12%

Tipping Fees

Whole Pallets

Stringers/Half Str.

Deckboards

Rustic Flooring

Clear Flooring

Chart 2. Net Present Value vs. Cost of Capital

($100,000)

($50,000)

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

5.0% 7.5% 10.0% 12.5% 15.0% 17.5% 20.0% 22.5% 25.0%

Cost of Capital

Note: The point where NPV=0 is the Internal Rate of Return. Net Present Value
23

in turn, the cost of capital affects the project’s NPV. The availability of low interest

debt, such as industrial revenue bonds, may make an otherwise unprofitable project

feasible.

Chart 3 as well as chart table 3 illustrates the sensitivity of NPV to changes in the

overall tax rate. Clearly, lower tax rates make a project more attractive. With this chart,

a user could determine the tax break (rate reduction) required to make an otherwise

unprofitable project feasible. Chart 3 of the example project shows that the project is

feasible at tax rates < 60 percent. It also shows that lowering the tax rate from 40 to 20

percent increases the NPV by approximately $90,000.

Chart Table 2. Net Present Value

for Various Cost of Capital Rates

Cost of Net

Capital Present Value

 5.0% $276,910.14

 7.5% $215,293.29

10.0% $160,986.06

12.5% $112,960.89

15.0% $70,354.86

17.5% $32,440.32

20.0% ($1,398.76)

22.5% ($31,685.86)

25.0% ($58,867.48)

Chart 3. Net Present Value vs. Tax Rate

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

0% 10% 20% 30% 40% 50% 60%

Tax Rate

Net Present Value
24

Chart Table 3. Net Present Value

for Various Tax Rates

Tax Rate NPV

$303,355

10% $258,043

20% $212,731

30% $167,419

40% $122,107

50% $ 76,795

60% $ 31,483

Chart 4 as well as chart table 4 depicts the sensitivity of NPV to changes in revenues.

Each line in chart 4 indicates the change in NPV to a percent change in revenues from a

specific revenue category. In the example project, a 20-percent decrease in wood

flooring revenue changes the NPV from $122,000 to $0. A 20-percent decrease in

tipping fees, on the other hand, would only lower the NPV from $122,000 to approximately $80,000. The profitability of the project is much more sensitive to wood

flooring revenues than to tipping fees.

Chart 4 can also be interpreted in terms of percent selling price changes. If the sales

volume of all products and services is assumed to remain constant, a percent change in

revenues will only result from changes in selling prices. In the example project, chart 4

shows that a 20-percent decrease in pallet part prices would lower the NPV from

$122,000 to approximately $20,000.

Chart 4. Sensitivity to Revenues

-$300,000

-$200,000

-$100,000

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

-60% -40% -20% 0% 20% 40% 60%

Percent Change

Tip Fees Whole Pallets Pallet Parts Flooring

NPV
25

Chart Table 4. Sensitivity to Revenues

Percent

 Net Present Value

Change Tip Fees Whole Pallets Pallet Parts Flooring

-60% -$17,904 $63,566 -$162,012 -$244,415

-40% $28,767 $83,080 -$67,306 -$122,241

-20% $75,437 $102,593 $27,401 -$67

0% $122,107 $122,107 $122,107 $122,107

20% $168,777 $141,621 $216,813 $244,281

40% $215,447 $161,134 $311,520 $366,455

60% $262,117 $180,648 $406,226 $488,628

Charts 5 and 6 as well as chart tables 5 and 6 are interpreted in the same manner as

chart 4. Chart 5 illustrates changes in whole pallet, pallet deckboard, and pallet stringer

revenues. Chart 6 illustrates changes in rustic flooring and clear flooring revenues.

Chart Table 5. Sensitivity to Pallet-Part Revenues

Percent Net Present Value

Change Stringers/Half Str. Deckboards

-60% $342 -$40,247

-40% $40,930 $13,871

-20% $81,518 $67,989

0% $122,107 $122,107

20% $162,695 $176,225

40% $203,284 $230,343

60% $243,872 $284,461

Chart 5. Sensitivity to Pallet Part Revenues

-$100,000

-$50,000

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

-60% -40% -20% 0% 20% 40% 60%

Percent Change Deckboards Stringers/Half Str.

NPV

Percent Change
26

Chart Table 6. Sensitivity to Flooring Revenues

Percent Net Present Value

Change Rustic Clear

-60% -$145,985 $23,677

-40% -$56,621 $56,487

-20% $32,743 $89,297

0% $122,107 $122,107

20% $211,471 $154,917

40% $300,835 $187,727

60% $390,199 $220,537

Chart 6. Sensitivity to Flooring Revenues

-$200,000

-$100,000

$0

$100,000

$200,000

$300,000

$400,000

$500,000

-60% -40% -20% 0% 20% 40% 60%

Percent Change

Rustic Clear

NPV
27

Chart 7 as well as chart table 7 illustrates the sensitivity of NPV to changes in key cost

categories. In the example project, the NPV is very sensitive to changes in labor costs.

An increase of approximately 6 percent in labor costs would make the project unprofitable. The profitability of the example project is not very sensitive to changes in

transportation costs or waste disposal costs.

Conclusion Pallet lumber recovery projects are environmentally responsible, save valuable forest

resources, and offer promising business opportunities. PROACT is a valuable tool that

can evaluate a wide range of pallet recovery projects. The use of project specific

information supplied by the user increases the accuracy and the validity of the feasibility study. Different scenarios of the same project can also be compared easily because

changes in inputs are instantly reflected in the feasibility study results. Designed for

use in Microsoft® Excel®, PROACT is easy to use, even for those unfamiliar with

computer spreadsheet programs. This computer tool satisfies the need for a userfriendly pallet recovery opportunity analysis.

Chart Table 7. Sensitivity to Costs

Percent Net Present Value

Change Disposal Labor Transport.

-60% $100,571 $1,352,957 $176,838

-40% $107,749 $942,674 $158,594

-20% $114,928 $532,390 $140,351

0% $122,107 $122,107 $122,107

20% $129,286 -$288,176 $103,863

40% $136,464 -$698,460 $85,619

60% $143,643 -$1,108,743 $67,376

Chart 7. Sensitivity to Costs

-$1,500,000

-$1,000,000

-$500,000

$0

$500,000

$1,000,000

$1,500,000

-60% -40% -20% 0% 20% 40% 60%

Percent Change

Disposal

Labor

Transportation

NPV
28

Literature Cited Araman, P.A.; Bush, R.; Reddy, V.J. 1997. Municipal solid waste landfills and wood pallets—what’s

happening in the United States. Pallet Enterprise. 17(2): 50-56.

Araman, P.A.; Hager, E.B.; Hammett, A.L. 1998. Bridging the gap between research and application:

business plan spreadsheets aid pallet recovery efforts. In: Extension forestry: bridging the gap between

 research and application—extension working party symposium: Proceedings of the 3rd International

Union of Forest Research Organizations. Blacksburg, VA: International Union of Forest Research

Organizations Extension Working Party: 3-12.

Brigham, E.; Gapenski, L. 1993. Intermediate financial management. New York: Dryden Press. 1,122 p.

Fuller, L.; Weber, L.; Buhyoff, G. 1997. Microcomputers for forestry and natural resources: an introduction

with examples. New York: McGraw Hill. 199 p.

Hager, E.B.; Araman, P.A.; Hammett, A.L. 1998. Disassembling discarded pallets to reclaim pallet

deckboards and stringers and to manufacture strip wood flooring—an operational and financial feasibility

study. In: Abstract and presentation, Forest Products Society annual meeting, 1998. Madison, WI: Forest

Products Society.

Keown, A.; Scott, D.; Martin, J.; Petty, J. 1996. Basic financial management. 7th ed. Upper Saddle River,

NJ: Prentice Hall. 924 p.

Tracy, J. 1996. The fast forward MBA in finance. 2d

 ed. New York: John Wiley. 320 p.
29

Glossary of Terms actual salvage value: the dollar amount that will actually be received by selling,

scrapping, or trading in the asset at the end of the project life. For actual salvage values

consult equipment dealers in your region.

book value: the value of a business as stated in a book of accounts.

capital assets: any long-term assets such as a building.

capital structure: the proportion of capital obtained from each of the three basic

capital sources. In the example project, the capital structure is made up of 50-percent

debt, 30-percent common equity, and 20-percent preferred equity.

clear flooring: flooring that does not contain defects or character marks such as knots,

holes, and bark.

cost of capital: the return investors and lenders demand from the funds made available

to the project (see Keown and others 1996). In the case of debt, it is the interest rate

minus the tax benefit of debt financing.

cost of debt: interest rate payments plus potential loan fees.

deckboard: surface pallet boards on the top and bottom of a pallet.

depreciation: the decrease in value due to wear and tear, decay, decline in price, etc. as

allowed in computing the value of property for tax purposes.

drop-off fee: fees charged to leave pallets at a pallet recovery firm.

hurdle rate: the minimum acceptable rate of return for a project of a given risk level.

The hurdle rate is used with the internal rate of return profitability analysis method.

initial deposit: minimum amount needed to open an account.

internal rate of return (IRR): the exact discount rate that equates the present value of

the project’s future cash flows with the initial cost of the project (Tracy 1996).

marketing channel: different ways of getting products from a producer to end customers.

net present value (NPV): the present value of the project’s future cash flows minus the

initial cost or capital investment (Brigham and Gapenski 1993).

net working capital: in the context of this computer model, net working capital is

defined as the money required to keep the business operating between the time costs

that are incurred and the time that revenues are received.

pallet: a structural device used to store and move products on.

pallet parts: parts used to make a pallet.
30

pickup fee: fee charged to remove unwanted pallets from a pallet user’s facility.

project life: the number of years for which the project is planned.

rate adjustment factor: the factor used to convert the hourly wage rate paid to the

worker into the actual hourly employee cost to the project.

real business tax rate: the total tax rate paid to Federal, State, and local governments.

required rate of return: the minimum rate of return necessary to attract an investor to

purchase or hold a security (Keown and others 1996). Common and preferred stocks

are types of securities.

rustic flooring: flooring that contains small sound defects or character marks, such as

small sound knots, holes, bud traces, and in the case of flooring made from used pallet

boards the flooring could also contain nail holes and some splits.

sales price: the price per unit of service or product actually received by the project

from their immediate customer.

salvage value: residual value left when life of investment period is over.

solid wood products: products composed primarily of solid wood such as pallets,

pallet parts, hardwood flooring, and lumber.

stringer: parts that separate deckboards in pallets so that forks can be used to lift and

move pallets.

strip wood flooring: random length flooring that is usually 21⁄4 inches wide, but also

comes in widths ranging from 11⁄2 to 31⁄4 inches.

tax benefit of debt financing: debt payments are deducted from the firm’s cash flows

before income taxes are calculated; therefore, financing with debt shields some income

from taxes. The weighted average interest rate for debt financed capital is multiplied by

1 minus the real business tax rate to account for the tax benefit.

tipping fees: fees charged the client to remove discarded pallets from the client’s

location (pickup fees) or fees charged the client when discarded pallets are delivered to

the project’s receiving yard (drop-off fees).

weighted average cost of capital (WACC): the weighted average of the cost of

common equity, the cost of preferred equity, and the after tax cost of debt. Commonly

used as an estimate of the project’s cost of capital.

wood fiber products (nonsolid): products composed of small pieces of wood, such as

wood chips, mulch, or wood scraps, that could be suitable for fuel.
Hager, E. Bradley; Hammett, A.L.; Araman, Philip A. 2003. PROACT user’s guide: how to use the pallet

recovery opportunity analysis computer tool. Gen. Tech. Rep. SRS-69. Asheville, NC: U.S. Department of

Agriculture, Forest Service, Southern Research Station. 30 p.

Pallet recovery projects are environmentally responsible and offer promising business opportunities. The Pallet

Recovery Opportunity Analysis Computer Tool (PROACT) assesses the operational and financial feasibility of

potential pallet recovery projects. The use of project specific information supplied by the user increases the

accuracy and the validity of the feasibility study. Different scenarios of the same project can also be compared

easily because changes in input are instantly reflected in the feasibility study results. PROACT is designed for use

with Microsoft® Excel®—the most widely used spreadsheet program on the market today. It is easy to use, even

for those unfamiliar with computer spreadsheet programs. PROACT is a workbook with three worksheets. This

guide provides users with a complete tour of two of these worksheets—inputs and reports—by describing cells,

defining terms, illustrating all on-screen tables and charts, and using an example project.

Keywords: Building materials, economic development, financial analysis, flooring, green products, pallet

lumber, pallet recycling, pallets, recycled wood flooring, wood recycling.
The Forest Service, United States Department of

Agriculture (USDA), is dedicated to the principle of

multiple use management of the Nation’s forest resources

for sustained yields of wood, water, forage, wildlife, and recreation.

Through forestry research, cooperation with the States and private

forest owners, and management of the National Forests and

National Grasslands, it strives—as directed by Congress—to provide

increasingly greater service to a growing Nation.

The USDA prohibits discrimination in all its programs and activities

on the basis of race, color, national origin, sex, religion, age,

disability, political beliefs, sexual orientation, or marital or family

status. (Not all prohibited bases apply to all programs.) Persons

with disabilities who require alternative means for communication

of program information (Braille, large print, audiotape, etc.) should

contact USDA's TARGET Center at (202) 720-2600 (voice and

TDD).

To file a complaint of discrimination, write USDA, Director, Office

of Civil Rights, Room 326-W, Whitten Building, 1400

Independence Avenue, SW, Washington, D.C. 20250-9410 or call

(202) 720-5964 (voice and TDD). USDA is an equal opportunity

provider and employer.