Grege-Staltmane, E. and Tuherm, H. 2010. Importance of Discount Rate in Latvian Forest Valuation.   Baltic Forestry 16 (2): 303 – 311.

Many forest scientists around the world have been spending a lot of time on forest value determination. One of the most widely used methods is the net present value method where asset’s value is calculated as the present value of future cash flow. The challenge of this method is the determination of an appropriate discount rate. A high discount rate reduces the present forest value. Therefore, the authors of the paper have analyzed available materials about discount rates in forestry, evaluating discount rate approaches, as well as inspection of specific cash flow subject to different discount rates with income from 1 ha spruce stand, which required an identical start-up capital. Research literature showed that the discounting involves decreasing a future value to its present value while compounding is the reverse. It was demonstrated clearly with the chart that high rates of compound interest cause a very rapid and unrealistic future value increase, while low rates cause slow value increase for a very long period represented by a common forest rotation; for that reason high discount rates used in forest investments are not rational. The factors – roundwood price, costs, increment and cutting age – are important for appropriate discount rate determination in forest valuation because these factors determine what can be earned. Forest risks may be incorporated by potential investors through application of a higher discount rate in case future incomes are endangered.

Key words: compound interest, discount rate, discount rate approaches, forestry risks, investment in forestry.