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Combining Forest-Level Analysis with Options Valuation Approach—A New Framework for Assessing Forestry Investment

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Abstract:

The conventional forest investment assessment at the stand level has difficulty dealing with multiple decisions and capturing the operational flexibility involved in timber production. By combining forest-level analysis with the options valuation approach, this article suggests a new framework for forestry investment assessment. We first articulate the new framework and discuss a few technical issues encountered in adopting it. Then, we present three empirical examples (entry decision, land acquisition, and harvest timing) to illustrate how forest-level analysis and/or real options valuation can be done and what we may learn from this type of exercise. We believe that while adopting this new framework entails challenges, it represents a great opportunity to expand the field of forest investment assessment. FOR. SCI. 47(4):475–483.

Keywords: Faustmann model; environmental management; forest; forest management; forest resources; forestry; forestry research; forestry science; landowner behavior; market uncertainty and risk; natural resource management; natural resources; operation decisions; profit function; stochastic price processes

Document Type: Miscellaneous

Affiliations: Department of Forestry, College of Agriculture and Natural Resources, Michigan State University, East Lansing, MI, 48824, Phone: (517) 432-3352; Fax: (517) 432-1143 yinr@msu.edu

Publication date: November 1, 2001

More about this publication?
  • Forest Science is a peer-reviewed journal publishing fundamental and applied research that explores all aspects of natural and social sciences as they apply to the function and management of the forested ecosystems of the world. Topics include silviculture, forest management, biometrics, economics, entomology & pathology, fire & fuels management, forest ecology, genetics & tree improvement, geospatial technologies, harvesting & utilization, landscape ecology, operations research, forest policy, physiology, recreation, social sciences, soils & hydrology, and wildlife management.
    Forest Science is published bimonthly in February, April, June, August, October, and December.

    2015 Impact Factor: 1.702
    Ranking: 16 of 66 in forestry

    Also published by SAF:
    Journal of Forestry
    Other SAF Publications
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