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Chapter 10: Case Study in Financial Modeling and Simulation of a Forestry Investment

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. Introduction. Forestry provides two types of long term benefits:- Wood benefits ; timber, poles, thinnings

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Chapter 10: Case Study in Financial Modeling and Simulation of a Forestry Investment

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  1. 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.

  3. Modeling Forestry Investment Cash Flow Structure General for ProjectsParticular 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 flowprediction over a long horizon is difficult. InvestmentEvaluation Criteria The Land Expectation Value(LEV) model is applied in preference to the NPV model.

  4. 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.

  5. ForestYield 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.

  6. Forestry Risks 1 • Establishment: drought, weeds • Production: storm, fire, pests and diseases, unsuitable species, collateral damage at harvest.

  7. 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.

  8. Predicting Cash Flows 1 The key growth indicator is the Mean Annual Increment. 0 20 50+ Years of growth

  9. Predicting Cash Flows 2 The Delphi method may be used to forecast the MAI, costs, and sales incomes.

  10. Predicting Cash Flows 3 Particular long-term data for native species is difficult to estimate.

  11. Solving the Model

  12. Solving the Model

  13. Solving the Model Define and predict the long term benefits

  14. Solving the Model Define and predict the long term benefits Asses the risks

  15. Solving the Model Define and predict the long term benefits Asses the risks Estimate the cash flows

  16. Solving the Model Define and predict the long term benefits Asses the risks Estimate the cash flows NPV LEV

  17. 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. Applying the Model

  18. 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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