Application of discount rate in forestry
2010
Grege-Staltmane, E., Latvia Univ. of Agriculture, Jelgava (Latvia)
Appropriate discount rate for forestry is still an issue for the forest economy. Therefore, it is significant to understand the importance of discounting, and how costs of forestry production process are valued. Forest regeneration and new stands tending costs are considered as investments; they are related to each particular stand. For that reason, the goal of this study was to compare how the value of this investment is growing at the bank deposit or 1 ha forest stand. The study examined the growth rate of two different tree species value with young forest stand establishment and tending investments depositing in the bank or the growth rate of compound interests. As discounting formula derived from a compounding formula, it would allow to find an appropriate discount rate for each timber species. High rates of compound interest cause a very rapid and unrealistic future value increase, while low rates cause slow value increase for a very long period represented by a common forest rotation; for that reason high discount rates used in forestry are not rational. Taking into account an income from intermediate cuttings, the value of timber species in comparison with the deposit significantly improves. Suitable discount rate determination in forest assessment is mainly determined by the species of wood productivity and cutting age. As it is hard to find two identical forest properties, each situation should be considered individually, taking into account and understanding the relationship between a growth rate of timber and compound interests, thus choosing an appropriate discount rate.
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