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Forest Finance Q&A: Timing of Cash Flows in Valuation Models

Q:             What is the appropriate timing of cash flows in a forest valuation model?

A:              In normal forest operations, we likely won’t know in advance if forest stands will be harvested at the beginning, middle or end of a given year.  This can affect the timeline in our discounted cash flow (DCF) model and, for large ownerships, could affect our net present value (NPV) estimates.  Generally, if we assume all harvesting occurs at the beginning of the year, each cash flow will be discounted one year earlier, which leads to a higher and optimistic NPV.  If we assume all harvesting occurs at the end of the year, we discount all cash flows one extra year and systematically and unnecessarily lower our NPV estimate.

In practical terms, we often split the difference and assume all harvesting occurs mid-year.  At an “ownership” level across the entire property, this reasonably, and conservatively, assumes harvesting activity occurs throughout the year for the life of the ownership.

Operationally, some timberland-owning firms incorporate the actual planting dates into their forward-looking harvest scheduling models.

Click here to learn about and register for “Applied Forest Finance” on February 10th in Atlanta, Georgia.  The course details necessary skills and common errors associated with the financial analysis of timberland and other forestry-related investments.

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