This post includes themes from the (virtual) Applied Forest Finance course on April 3^rd, 2025. Early registration ends March 20^th! Participants also receive copies of the new 7^th edition of Forest Finance Simplified.

We learn by doing. This is true for learning to ride a bike, catch a boomerang, and conduct financial analysis. When it comes to analyzing current and potential investments, multiple approaches exist, depending on your objectives and priorities. This post emphasizes a simple, systematic approach to conducting financial analysis that strengthens skills and minimizes errors.

Financial Analysis in Three Steps

First, specify the question (“what is the question?”). Value-added analysis or research starts by clarifying a question to answer and the audience we’re preparing this for. Our analysis helps the person making a decision, and if they don’t agree on the question or understand the analysis, we’ve done nothing useful.

Second, apply the appropriate formula to answer the question. Deciding which financial criterion to use depends on the question asked. When evaluating whether a specific investment satisfies basic DCF criteria, certain questions may favor one metric over another.

Third, check the results. What do they mean? Do the numbers make sense? Through checking results consistently over time, we develop a sense for ranges and logic, which improves our general fluency and intuition in forestry and finance.

Example: Your Neighbor Sells Some Forestland

A neighbor offers to sell you 40 acres of adjoining forestland that will be ready to harvest in about eight years. Your forester thinks the timber and land will be worth about $2,700 per acre at that time. If your discount rate (opportunity cost) is 5%, what would you be willing to pay for this land per acre today?

First, confirm the question: What is the present value today of $2,700 assuming a 5% discount rate and an eight-year investment period?

Second, we apply the present value formula:

Present Value  = Future Value/(1 + rate)n
               = $2,700/(1 + .05)8
               = $1,827.47

Third, check the results. Discounting $2,700 at 5% for 8 years is the mirror of taking $1,827 and investing at 5% for 8 years. You decide to take a closer look at the property and see if the neighbor will accept $1,750 per acre while discussing the matter over a cold beer.