Journal of Forest Economics > Vol 35 > Issue 1

Consequences of Discount Rate Selection for Financial and Ecological Expectation and Risk in Forest Management

Joseph Buongiorno, University of Wisconsin-Madison, USA, Mo Zhou, Purdue University, USA, mozhou@purdue.edu
 
Suggested Citation
Joseph Buongiorno and Mo Zhou (2020), "Consequences of Discount Rate Selection for Financial and Ecological Expectation and Risk in Forest Management", Journal of Forest Economics: Vol. 35: No. 1, pp 1-17. http://dx.doi.org/10.1561/112.00000515

Publication Date: 22 Jan 2020
© 2020 J. Buongiorno and M. Zhou
 
Subjects
 
Keywords
Investment analysisDiscount rateRiskMarkov modelUnevenaged forestEcological diversity
 

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In this article:
1. Introduction
2. Methods and Data
3. Results
4. Summary and Conclusion
References

Abstract

The objective of this study was to explore methods to measure the effect of the choice of discount rates on the expected value and risk (measured with standard deviation) of the net present value (NPV) of financial returns, and on the expected value and risk of undiscounted ecological criteria resulting from optimum financial policies. An application to mixed-species uneven-aged forests of the US South showed that high discount rates, known to lower the NPV, also lowered its standard deviation, making investments appear less risky. However, the discount rate had practically no effect on the expected value and standard deviation of the undiscounted annual financial returns obtained by maximizing the NPV. Furthermore, when maximizing the NPV, the discount rate had little effect on the expected value of the undiscounted basal area, stock of CO2, and tree diversity. However, the standard deviation of these ecological criteria was markedly lower at high discount rates, making the forest ecosystem appear more stable.

DOI:10.1561/112.00000515