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[FLM JANUARY / FEBRUARY 2012 ] financial analysis in forest investment resources
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Forest Landowner

Volume 71, Issue 1, January • Febuary 2012, Pages 14-19
"Promoting Private Forests"

 

 

 

   

FINANCIAL ANALYSIS

"In Forest Investment."


Bin Mei and Michael L. Clutter

BIN MEI ASSISTANT PROFESSOR OF FOREST FINANCE AND ECONOMICS, WARNELL SCHOOL OF FORESTRy AND NATURAL RESOURCES, UNIVERSITy OF GEORGIA.

MICHAEL L. CLUTTER DEAN AND PROFESSOR OF FOREST FINANCE AND MANAGEMENT, WARNELL SCHOOL OF FORESTRy AND NATURAL RESOURCES, UNIVERSITy OF GEORGIA.

 

   
   

Abstract
This article reviews a variety of capital budgeting approaches in forest investment analyses and examines forestland assets in the framework of modern portfolio theory. The article discusses forestland as a potential diversifier for an invesment portfolio and explains drivers of return on investment (ROI) and their percentage contributions. The article explains formulas for determining and analyzing forestland net prestent value, periodic cash flow values, and land expection value. The article introduces the land expectation value formula as a financial tool for landowners to use in allocating appropriate values to timber and land for tax purposes. The internal rate of return on forestland  values indicative of higher returns are discussed. The article identifies appropriate finanacial analysis tools that take market uncertainty into account. The article explains how to apply marginal analysis and break-even conditions to forestland investment to weigh incremental costs against future higher economic gains. Also covered is managerial flexibility and real options approach and when to sell timber to realize higher timberland returns and lower variances. The article concludes that various advanced approaches are derived from the NPV analysis and should be used in combination along with future economic condition forecasts to analyze the long-term investment of forestland.

 

   
   

Abbreviations
NPV, Net Present Value; LEV, Land Expectation Value;IRR, Internal Rate of Return; ROI, Return on Investment; C, initial planting costs; R, total future timber revenues; T, rotation length; r, discount rate; I, NPV from one rotation;

Keywords
Long-term investments; capital assest pricing model; systematic risk; break-even cost for improved seedlings; optimal roataion age; Hurdle Rate;potential losses; market uncertainty; scenario analysis; monte carlo simulation; marginal analysis; break even conditions; managerial flexibility; real options; Internal Rate of Return; Future Timber Revenues; Land Expectation Value; Potential gains; Biological Growth; Timber Price; Land Price; Return; Forestland Valuation; Stumpage Price; Dominant Drivers; total timberland returns;Time Value; Discounting; Future Cash Flows;

Works Cited:
CASCIO, A.J., and M.L. CLUTTER. 2008. Risk and required return assessments of equity timberland                   investments in the United States. Forest Products Journal 58(10):61-70.

CLUTTER, M.L., M. KANE, B. BORDERS, P. BETTINGER, and J. SIRY. 2006. A Method for Calculating the Internal Rate of Return on Marginal Silviculture Investments. Technical Report 2006-3. 11 p.

CONROY, R., and M. MILES. 1989. Commercial forestland in the pension portfolio: The biological beta. Financial Analysts Journal 45(5):46.

MEI, B. 2011. Assessing Commercial Timberland Assets in the United States: Empirical Research. LAPLAMBERTAcademic Publishing, Saarbrücken, Germany. 120 p.

MEI, B., and M.L. CLUTTER. 2010. Evaluating the financial performance of timberland investments in the United States. Forest Science 56(5):421-428.

MEI, B., M.L. CLUTTER, and T.G. HARRIS. 2010. Modeling and forecasting pine sawtimber stumpage prices in the US South by various time series models. Canadian Journal of Forest Research 40(8):1506-1516.

REDMOND, C.H., and F.W. CUBBAGE. 1988. Portfolio risk and returns from timber asset investments. Land Economics 64(4):325-337.

ZINKHAN, F.C. 1988. Forestry projects, modern portfolio theory, and discount rate selection. Southern Journal of Applied Forestry 12(2):132-135.

ZINKHAN, F.C. 1991. Option pricing and timberland’s land-use conversion option. Land Economics 67(3):317.

   

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