Case Study in Financial Modeling and Simulation of a Forestry Investment potx

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

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.

 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.

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.

Key Parameters in Forestry Models

 Establishment:- land, land preparation,

plant stock, planting, watering.

 Maintenance:- weed control, fertilizing,

pruning and thinning, fire and pest

protection.



wood; commercial thinning, final harvest

non-wood; flora gathering, recreation,

land renewal.

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.

Forestry Risks 1

 Establishment:

drought, weeds

 Production:

storm, fire,

pests and diseases,

unsuitable species,

collateral damage at harvest.

Forestry Risks 2

pruning and thinning, poor growth, timber usage and fashion changes.

taxation changes, uncertain harvest rights

Predicting Cash Flows 1

The key growth indicator is the

0 20 50+

Predicting Cash Flows 2

forecast the MAI, costs, and sales incomes.

Predicting Cash Flows 3

Particular long-term data for native

species is difficult to estimate.

Solving the Model

Solving the Model

Solving the Model

Define and predict the

long term benefits

Solving the Model

Define and predict the

long term benefits

Asses the risks

Solving the Model

Define and predict the

long term benefits

Asses the risks

Estimate the cash flows

Solving the Model

Define and predict the

long term benefits

Asses the risks

Estimate the cash flows NPV LEV

 Sensitivity Analysis

 Variables:

stumpage price

yield - thinning

yield - poles

yield - timber

weed control

pruning.

or Yr 60

Analysis of sensitive variables.

Forestry Modeling

 Forestry projects are long term.

predict.

particular to forestry.

forecast values.