Possible forestry investment returns in emerging Europe –comparing theoretical ‘generic forests’ representative of selected countries
Chappell, Peter J S (2019)
2019
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Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:amk-202001081106
https://urn.fi/URN:NBN:fi:amk-202001081106
Tiivistelmä
The merits of forestry investment in different countries depends not just on the local silvicultural forestry credentials, but also local costs of capital or discount rate, inflation, risk, and land acquisition costs. The objective of this thesis was to analyse which nations in the ‘emerging Europe’ region would be the best places to consider for forestry investment. The study area was defined as Estonia, Latvia, Lithuania, Poland, Hungary, Slovenia and Romania. Finland was also included as the base of the study.
A Discounted Cash flow (DCF) approach was used. Internal Rate of Return (IRR), Net Present Value (NPV) and Land Expectation Value (LEV) metrics were calculated. The DCF was built on assumptions of a theoretical private forest property featuring representative attributes of that country. Critical characteristics such as area, tree species, crop development stage, land acquisition costs, timber prices and so on, were obtained using open source data or by reference to literature. The IRR, NPV and LEV metrics were collected for three scenarios considering country’s owns costs of capital and inflation (scenario 1), standard costs of capital and country’s own inflation (scenario 2), and finally standard costs of capital and standard inflation (scenario 3).
From an NPV standpoint, Hungary was found to be the most desirable location for investment offering the greatest wealth return. Hungary also had the greatest LEV, but this did not consider land acquisition cost. However, IRR was deemed the most meaningful metric to compare rates of return, and the result under all scenarios was that Latvia was found to exhibit the greatest IRR.
In the future the results could be enhanced through: consideration of different forest types, such as exotic species plantations, incorporation of better DCF assumptions through availability of more open source data or research cooperation, incorporation of taxation into the DCF, account taken of risk variance between nation’s contingency costs, valuation amendment to account for management flexibility and sensitivity analysis of possible future inflationary and capital cost variance.
A Discounted Cash flow (DCF) approach was used. Internal Rate of Return (IRR), Net Present Value (NPV) and Land Expectation Value (LEV) metrics were calculated. The DCF was built on assumptions of a theoretical private forest property featuring representative attributes of that country. Critical characteristics such as area, tree species, crop development stage, land acquisition costs, timber prices and so on, were obtained using open source data or by reference to literature. The IRR, NPV and LEV metrics were collected for three scenarios considering country’s owns costs of capital and inflation (scenario 1), standard costs of capital and country’s own inflation (scenario 2), and finally standard costs of capital and standard inflation (scenario 3).
From an NPV standpoint, Hungary was found to be the most desirable location for investment offering the greatest wealth return. Hungary also had the greatest LEV, but this did not consider land acquisition cost. However, IRR was deemed the most meaningful metric to compare rates of return, and the result under all scenarios was that Latvia was found to exhibit the greatest IRR.
In the future the results could be enhanced through: consideration of different forest types, such as exotic species plantations, incorporation of better DCF assumptions through availability of more open source data or research cooperation, incorporation of taxation into the DCF, account taken of risk variance between nation’s contingency costs, valuation amendment to account for management flexibility and sensitivity analysis of possible future inflationary and capital cost variance.