THE DETERMINATION OF RISK ADJUSTED DISCOUNT RATES FOR PRIVATE SECTOR FORESTRY INVESTMENT

In forestry economics a great deal of attention has been given to the choice of discount rate when this activity has been constituted as part of the public sector investment portfolio. In contrast, little attention has been paid to the discount rate that should be used when afforestation is considered as part of a portfolio of investments in the private sector. There are major difficulties, both practical and methodological, in determining the discount rate that should be applied to private as opposed to public sector afforestation projects. The central purpose of this paper is thus to derive the appropriate discount rate for private sector forestry with attention focused primarily on risk adjusted discount rates of the type applied in commercial capital budgeting. The relevant risk adjusted rates are then employed to assess the viability of a 28.5 ha private sector afforestation stand based on Oceanic forestry technology. The afforestation project is assessed under the differing tax and grant anangements introduced in 1988, available within the Farm Woodland Scheme and the Woodland Grant Scheme. The analysis finally concludes that the use of a risk adjusted discount rate leads to forestry, under both schemes, being characterized as a profitable venture. © 1990 Oxford University Press.