Forest management decision making based on a real options approach: An application to a case in northeastern Argentina
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 growt...
| Main Authors: | , , , , |
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| Format: | Article |
| Language: | English |
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Sciendo
2017-12-01
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| Series: | Metsanduslikud Uurimused |
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| Online Access: | https://doi.org/10.1515/fsmu-2017-0015 |
| _version_ | 1818393271027630080 |
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| author | Broz Diego Milanesi Gastón Rossit Daniel Alejandro Rossit Diego Gabriel Tohmé Fernando |
| author_facet | Broz Diego Milanesi Gastón Rossit Daniel Alejandro Rossit Diego Gabriel Tohmé Fernando |
| author_sort | Broz Diego |
| collection | DOAJ |
| description | 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. |
| first_indexed | 2024-12-14T05:42:39Z |
| format | Article |
| id | doaj.art-4986711d48e34dc9a7d4a4c67af19a06 |
| institution | Directory Open Access Journal |
| issn | 1736-8723 |
| language | English |
| last_indexed | 2024-12-14T05:42:39Z |
| publishDate | 2017-12-01 |
| publisher | Sciendo |
| record_format | Article |
| series | Metsanduslikud Uurimused |
| spelling | doaj.art-4986711d48e34dc9a7d4a4c67af19a062022-12-21T23:14:59ZengSciendoMetsanduslikud Uurimused1736-87232017-12-016719710810.1515/fsmu-2017-0015Forest management decision making based on a real options approach: An application to a case in northeastern ArgentinaBroz Diego0Milanesi Gastón1Rossit Daniel Alejandro2Rossit Diego Gabriel3Tohmé Fernando4Universidad Nacional del Misiones, Faculta de Ciencias Forestales (CONICET), Bertoni 124, Eldorado, Misiones, ArgentinaUniversidad Nacional del Sur, Departamento de Ciencias de la Administración, San Andrés 800, Altos de Palihue, Bahía Blanca, ArgentinaINMABB, Departamento de Ingeniería, Universidad Nacional del Sur (UNS)-CONICET, Avenida Alem 1253, Bahía Blanca, ArgentinaIIESS, Departamento de Ingeniería, Universidad Nacional del Sur (UNS)-CONICET, Avenida Alem 1253, Bahía Blanca, ArgentinaINMABB, Departamento de Economía, Universidad Nacional del Sur (UNS)-CONICET, Avenida Alem 1253, Bahía Blanca, ArgentinaThe 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.https://doi.org/10.1515/fsmu-2017-0015real optionsbinomial modelbinomial tree |
| spellingShingle | Broz Diego Milanesi Gastón Rossit Daniel Alejandro Rossit Diego Gabriel Tohmé Fernando Forest management decision making based on a real options approach: An application to a case in northeastern Argentina Metsanduslikud Uurimused real options binomial model binomial tree |
| title | Forest management decision making based on a real options approach: An application to a case in northeastern Argentina |
| title_full | Forest management decision making based on a real options approach: An application to a case in northeastern Argentina |
| title_fullStr | Forest management decision making based on a real options approach: An application to a case in northeastern Argentina |
| title_full_unstemmed | Forest management decision making based on a real options approach: An application to a case in northeastern Argentina |
| title_short | Forest management decision making based on a real options approach: An application to a case in northeastern Argentina |
| title_sort | forest management decision making based on a real options approach an application to a case in northeastern argentina |
| topic | real options binomial model binomial tree |
| url | https://doi.org/10.1515/fsmu-2017-0015 |
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