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CHOOSING OPTIMAL INTEREST RATE FOR SUSTAINABLE FOREST MANAGEMENT

Irina Pilvere

Abstract

Forest value depends on multiple factors, as well as on prevailing market conditions. It is measured in natural units. The most popular approach in calculating the economic value of a forest is the discounted cash flow method. The most influential factor is an discount rate, since the value determination is based on the assumption that a forest life cycle is 120 years. Therefore, the overall aim of the present research is to evaluate an optimal discount rate for long-term forest management. The research showed that the largest state-owned forest companies in the Baltic and Nordic countries mostly follow a vertically integrated business model that makes them use an interest rate to raise up to the levels of the industry, where the company operates. The authors analyse the existing discount rate levels for ensuring steady and long-term forest management in state-owned companies. Even though the state-owned forest companies in the Nordic countries use the discount rate of 4-6%, the authors conclude that a lower interest rate could contribute to increasing the efficiency of forest management. This could result in higher value for the society in the long term.

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DOI resolver: doi.org/10.5593/sgem2019/3.2/s14.083

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