Forest valuation and risk

Abstract

This paper aims to illustrate ways in which sources of risk can affect the valuation of a commercial plantation estate. Deterministic and stochastic analyses of a hypothetical commercial plantation estate are compared. Both are built on a long-term harvest schedule of wood flows that typifies current planning and valuation practices for large commercial plantation estates. The stochastic analyses incorporate typical systematic risks, including those associated with harvest yields, costs, prices and fire. Deterministic valuation using a market discount rate that includes a risk premium underestimates the expected value of the combined asset. Applying such a discount rate to a stochastic valua..