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.
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Forestry Risks 1
Establishment: drought, weeds
Production: storm, fire, pests and diseases, unsuitable species, collateral damage at harvest.
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Forestry Risks 2 Timber return: inappropriate
pruning and thinning, poor growth, timber usage and fashion changes.
Sovereign risk: regulatory changes, taxation changes, uncertain harvest rights.
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Predicting Cash Flows 1 The key growth indicator is the Mean Annual Increment.
0 20 50+
Years of growth
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Predicting Cash Flows 2
The Delphi method may be used to forecast the MAI, costs, and sales incomes.
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Predicting Cash Flows 3
Particular long-term data for native species is difficult to estimate.
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Solving the Model
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Solving the Model
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Solving the Model
Define and predict the long term benefits
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Solving the Model
Define and predict the long term benefits
Asses the risks
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Solving the Model
Define and predict the long term benefits
Asses the risks
Estimate the cash flows
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Solving the Model
Define and predict the long term benefits
Asses the risks
Estimate the cash flows
NP V LEV
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Scenario Analysis Harvest at Yr 34, or Yr 60 Monte Carlo Analysis of sensitive variables.
Sensitivity Analysis Variables: stumpage price yield - thinning yield - poles yield - timber weed control pruning.
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Forestry Modeling
Forestry projects are long term. Costs and benefits are difficult to
predict.
Growth risks and product types are
particular to forestry.
Modeling helps to analyze the
forecast values.
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