<abstract xmlns="http://www.w3.org/1999/xhtml"><p>The Net Present Value (NPV) approach is widely applied to assess forest investments, but this method has serious shortcomings, which we propose to overcome by switching to the assessment through the Real Options Approach (ROA). The model in this paper starts with the simulation of the forest’s growth, combined with the projection of the products’ prices and valuing the assets using a binomial model. We include an option of postponement, determining the optimal period of felling. We find that ROA is more robust than the NPV approach because it relaxes the assumption of constancy of both the prices and the discount rate, allowing the determination of the optimal time of felling based on the growth rate of either the forest or the prices of its products. Contrary to the traditional NPV approach, the results obtained with ROA exhibit longer harvest turns and consequently higher profits. The key variable in the ROA, the Real Option Value (ROV) can be shown to be less (albeit moderately) sensitive to decreases of the discount rate than NPV. Moreover, ROV is moderately sensitive to decreases in the price of logs and is negligibly affected by rises in the costs of harvesting, loading and transporting rolls.</p></abstract>

The Net Present Value (NPV) approach is widely applied to assess forest investments, but this method has serious shortcomings, which we propose to overcome by switching to the assessment through the Real Options Approach (ROA). The model in this paper starts with the simulation of the forest’s growth, combined with the projection of the products’ prices and valuing the assets using a binomial model. We include an option of postponement, determining the optimal period of felling. We find that ROA is more robust than the NPV approach because it relaxes the assumption of constancy of both the prices and the discount rate, allowing the determination of the optimal time of felling based on the growth rate of either the forest or the prices of its products. Contrary to the traditional NPV approach, the results obtained with ROA exhibit longer harvest turns and consequently higher profits. The key variable in the ROA, the Real Option Value (ROV) can be shown to be less (albeit moderately) sensitive to decreases of the discount rate than NPV. Moreover, ROV is moderately sensitive to decreases in the price of logs and is negligibly affected by rises in the costs of harvesting, loading and transporting rolls.

Forest management decision making based on a real options approach: An application to a case in northeastern Argentina

Departamento de Ciencias de la Administración

Universidad Nacional del Sur (UNS)-CONICET

Forestry Studies

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

The Net Present Value (NPV) approach is widely applied to assess forest investments, but this method has serious shortcomings, which we propose to overcome by...

Forest management decision making based on a real options approach: An application to a case in northeastern Argentina

Published Online: Apr 25, 2018

Page range: 97 - 108

Received: Aug 16, 2017

Accepted: Feb 19, 2018

DOI: https://doi.org/10.1515/fsmu-2017-0015

Keywords
real options, binomial model, binomial tree

© 2017 Diego Broz et al., published by De Gruyter Open

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Forest management decision making based on a real options approach: An application to a case in northeastern Argentina

Published Online: Apr 25, 2018

Page range: 97 - 108

Received: Aug 16, 2017

Accepted: Feb 19, 2018

DOI: https://doi.org/10.1515/fsmu-2017-0015

Keywordsreal options, binomial model, binomial tree

© 2017 Diego Broz et al., published by De Gruyter Open

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Keywords
real options, binomial model, binomial tree