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Chapter 10: Case Study in
Financial Modeling and
Simulation of a Forestry
Investment
Investment in forestry as an
example of capital budgeting
techniques applied to long
term projects.
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Introduction
Forestry provides two types of long
term benefits:-
Wood benefits;
timber, poles, thinnings
Non-Wood benefits;
environmental protection,
wildlife habitat,
land restoration,
recreational environment.
Both these benefits can span a lifetime
of over 50 years.
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Cash Flow Structure
General for Projects Particular to Forestry
initial cash outlay long term maintenance
inflows from sale of product timed on-going outlays:-
thinnings, maintenance,
income- poles or timber?
income – time of harvest?
Cash Flow Forecasting
Cash flow prediction over a long horizon is difficult.
Investment Evaluation Criteria
The Land Expectation Value(LEV) model is applied
in preference to the NPV model.
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Key Parameters in Forestry
Models
Establishment:- land, land preparation,
plant stock, planting, watering.
Maintenance:- weed control, fertilizing,
pruning and thinning, fire and pest
protection.
Inflows:-
wood; commercial thinning, final harvest
non-wood; flora gathering, recreation,
land renewal.
Required rate of return.
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Forest Yield Factors
Wood growth is measured by the
MAI: Mean Annual Increment;
‘the annual increase in cubic meters of
harvestable timber per hectare’.
The MAI is influenced by-
relevant rainfall, soil fertility,
species mixture, planting régime,
crop protection.
Final monetary payoff is influenced by-
harvest age, species type, timber price.