Threat, discount premiums, net present value and

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.

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Scandinavian Forest Economics: Proceedings of the Biennial Meeting of the Scandinavian Society of Forest Economics
2010, 43
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 Record created 2017-04-01, last modified 2020-10-28

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