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

BROZ, DIEGO; MILANESI, GASTÓN; ROSSIT, DANIEL ALEJANDRO; ROSSIT, DIEGO GABRIEL; TOHMÉ, FERNANDO

Forestry Studies

Estonian University of Life Sciences

Año: 2017 vol. 67 p. 97 - 108

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 withthe 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 fi nd 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 pricesof its products. Contrary to the traditional NPV approach, the results obtained with ROA exhibit longer harvest turns and consequently higher profi ts. 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 costsof harvesting, loading and transporting rolls.