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

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  • Buongiorno, Jospeh
  • Zhou, Mo

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.

Suggested Citation

  • Buongiorno, Jospeh & Zhou, Mo, 2020. "Consequences of Discount Rate Selection for Financial and Ecological Expectation and Risk in Forest Management," Journal of Forest Economics, now publishers, vol. 35(1), pages 1-17, January.
    • Handle: RePEc:now:jnljfe:112.00000515
    DOI: 10.1561/112.00000515
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    Cited by:

    1. Tahvonen, Olli & Suominen, Antti & Malo, Pekka & Viitasaari, Lauri & Parkatti, Vesa-Pekka, 2022. "Optimizing high-dimensional stochastic forestry via reinforcement learning," Journal of Economic Dynamics and Control, Elsevier, vol. 145(C).

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