The Value of Damaged Timber

I enjoyed reading the "Here's How to Value Damaged Timber" in the May 2010 issue of The Forestry Source. I found the article to be clear and well written, but I have one methodological correction that I would like to share with your readers.

The author states that, "These calculations are based on three important concepts. First, all prior costs are sunk costs, so they are irrelevant." Generally, this is a true statement. However, in the case where the current timber stand is managed under the same regime as all future timber stands, one can also calculate the value of the damaged stand by compounding all costs incurred minus all revenues received to the date the timber stand is damaged. Thus, for the example shown in Figure 3, one can calculate the value of the 18 year old immature timber stand as the sum of the compound value of the regeneration cost plus the compound value of the annual land rent forgone:

V18 = \$125 (1.07)18 + .07(\$577.55)[((1.07)18 - 1)/ .07] = \$1797.02

If we add the land expectation value (\$577.55), we obtain the value of the forest (i.e., the land plus immature timber value) = \$2374.57.

In his seminal 1849 article, Martin Faustmann demonstrated that the compounding of all incurred costs less any revenues received at the date the immature timber stand is damaged is equal to the net present value of all costs and revenues expected to occur over the remaining years in the rotation. If, however, the current timber stand is managed differently from all future stands, only the discounting approach described by the author yields the correct value of the damaged immature stand.

B. Bruce Bare, Dean Emeritus and Professor