Forest valuation under the generalized Faustmann formula

This paper attempts to address the question of how the value of the forest, the land, and the standing timber should be determined under the generalized Faustmann formula when the beginning and ending value of the land may be different. First, the formulas to determine the value of the forest and the land under such a situation were derived. These formulas were then used to separate the value of the trees from that of the forest. A comparison of the correctly determined valuations of the land against those obtained through a frequently used approximation method showed that at interest rates commonly used, the approximation method overestimates the land value and underestimates the value of the standing timber. Sensitivity analyses showed that higher future land value tends to affect the value of the land less at the beginning of the rotation and more at the end. Its impact on the value of the standing timber may or may not be affected, depending on whether the optimal harvest age is affected or not. Higher final harvest value and higher interest rate affect both the value of the land and the value of the standing timber throughout the entire rotation. Lastly, higher regeneration at the beginning of the rotation simply re-allocates the forest value between that of the land and that of the standing timber, reducing the former while increasing the latter.