Case Study in Financial Modeling and Simulation of a Forestry Investment potx
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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.
2
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
NPV
LEV
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Sensitivity Analysis
Variables:
stumpage price
yield - thinning
yield - poles
yield - timber
weed control
pruning.
Scenario Analysis
Harvest at Yr 34,
or Yr 60
Monte Carlo
Analysis of
sensitive
variables.
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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.
