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Abstract
Similarly to financial risk in markets, physical risk (threat or hazard) has
sometimes been treated by adding a premium to the discount rate used for
the NPV calculations applied to forestry options. As it happens, a discount
rate premium reflecting the rate of threat gives the correct rotation and, by
simple adjustment, the correct land expectation value, but only if the threat
occurs at a constant rate throughout the rotation and if destruction − if it
happens at all − is complete. If some value can be salvaged following the
destructive event, neither optimal rotation nor land expectation value is
correctly determined by using a threat premium. The same is true when the
threat level changes during the rotation, even if the threat rate used would
correctly predict the probability of crop survival to the age of optimal
rotation. These findings may be illustrated with calculations based on windsusceptible
crops in the UK.