Topic 2.3

• Cashflow – consists of inflows and outflows of funds representing receipts and expenditures
• Net cashflow – difference between inflows and outflows
• Resource flow – similar to cashflow; requires the quantification and valuation of socio-economic and environmental benefits and costs of a project and treating these as if they were all cash
• Costs of resource inputs correspond to cash disbursements
• Net benefit corresponds to the net cashflow
• Discount rate – depends on the purpose of the discounted cashflow
• Discount rate – rate of interest used in calculating the present value of future cash inflows or outflows; concept of time value of money uses discount rate to determine the value of a future amount of money today
• Interest rate – price paid for the use of money or capital, the cost of borrowing other’s funds or the amount earned by lending funds
• 3. Discounting period – the number of years over which benefits and costs are measured
• PROFITABILITY INDICATORS - used to assess projects and support decision making by providing information on the efficiency of projects and their capacity to generate value”
• profitability indicators - allow the comparative analysis of project options and comparisons between proposed projects and BAU” (Business as Usual)
• Formulas PROFITABILITY INDICATORS

  1. Net Present Value (NPV)
  2. Soil Expectation Value (SEV)
  3. Benefit-Cost Ratio (BCR)
  4. Internal Rate of Return (IRR)
• The present value of the net cashflow of a project

  • The sum of discounted benefits and costs

  • Indicates what the project will earn in present value terms

  Net Present Value
• measures the returns of a timber stand for one rotation only?

  net present value
• • Measures the returns on a forest land

  • Assumes an infinite number of rotations

  • Also called Faustmann’s formula?

  Soil Expectation Value
• formula for?

  SEV

  
• formula for?

  NPV

  
• The ratio of the present value of benefits to the present value of costs?

  Benefit-cost ratio
• The discount rate that makes NPV = zero

  • Measures the average rate earned on all costs prior to the time of timber harvest?

  Internal rate of return
• In Internal Rate of Return:

  • If i is low, NPV tends to be positive

  • If i is high, NPV tends to be negative
• formula for?

  Internal Rate of Return

  
• In interpolating the IRR,

  if the NPV is positive, add 5%

  if the NPV is negative, minus 5%
• the project is feasible

  
• if the NPC, SEV, BCR, IRR are like this, the project is not feasible.

  
• if the NPV, SEV, BCR, IRR are like this, the project is indifferent.

  
• three elements of the formula of profitability indicators?

  interest rate, discount rate, and discounting period