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
Cash Flow Structure
General for Projects Particular to Forestry
initial cash outlay long term maintenance
inflows from sale of product timed on-going outlays:-

‘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

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.