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    ABSTRACT

New Zealand Journal of Forestry (2000) 45(2): 3–12
©New Zealand Institute of Forestry

Research article
Focus on the treatment of risk in forest valuations.

B. Liley

Christchurch, New Zealand: New Zealand Institute of Forestry.

New Zealand forest valuations are commonly based on a discounted cash flow (DCF) modelling approach. Since this requires the prediction of future financial performance, the valuation structure inherently invites the consideration of potential risks. Risk may be addressed in a DCF environment by two means: through the application of a risk-adjusted discount rate, or through making sufficient allowances in the projected cash flows. Informed opinion recommends the latter. The paper describes example models in which risk-modified cash flows have been simulated, and in particular those which have employed stochastic modelling procedures. Forest valuers are not observed to apply such measures routinely. In their practice of applying Implied Discount Rates (that is, those derived from market evidence), New Zealand valuers are in effect using rates which are in some measure risk-adjusted. The paper includes observations on the greater refinement emerging in reporting sensitivity analyses, and the propensity to refer to risk in the valuers' disclaimer.
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