Valuation and Appraisal of Forest

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Last Updated on April 3, 2020 by Naeem Javid Muhammad Hassani

VALUATION AND APPRAISAL OF FOREST AND OTHER PROPERTIES

VALUATION/APPRAISAL:

  • It is the process of determining or estimating the value of something (tangible or intangible).
  • The process of determining the value of the resources employed in a production function is known as valuation. It is also known as Appraisal.

Value:

  • A fair return in the shape of money, service, exchange.

The value in use:

  • Usefulness of a commodity to satisfy a human want eg air, water, etc.

The value in exchange:

  • Power of a commodity in exchange eg 10 kg cotton = 30 kg wheat.

FOREST LAND VALUE:

  • Land and the growing stock on it are the basic capital or our timber resources.
  • Due to the relatively heavy and permanent nature of the investment, the valuation of land and the growing stock is of great importance.
  • Market value for forest production process generally does not exist and where they do often give imperfect and incomplete expression of investment values.



FACTORS DETERMINING FOREST LAND VALUE:

  • Since the forest land takes its value from the crop it produces, the productive capacity of the land will, therefore, determine its value.
  • The productive capacity of land depends upon the following factors:
  1. The kind and intensity of mgt
  2. The market value of the product.
  3. The importance of time interval involved.
  • Commonly following approaches are applied to appraise forest land and growing stock to make forest mgt decisions:
  1. Expectation value
  2. Cost value
  3. Market value

 

Expectation Value:

  • It is a very simple approach.
  • A forest land derives its value from the crops which can be grown on it. If the land can not produce anything the value of it will be zero.
  • In other words, its productive capacity will determine its value.
  • The land remains unproductive until and unless the technology is applied to use it.
  • The productive capacity of land depends upon:
    • Site Quality:

  • The SQ is the grading/ classification of land according to its productive potential and determines the biological potential of the land.
  • Thus the land with high biological potential will fetch more price as it can produce more quality.
    • Management Plan:

  • It provides information about the past and presents growing stock and the actual amount of crop growing under different mgt systems.
  • If we have poor mgt plans, we will get a poor return. The biological resource must consider:
    • Spp composition eg Shisham is very economical or poplar is fast growing.
    • Regeneration eg natural regeneration is cheaper than artificial.
    • The rate of stocking (ie density)
    • Rotation period

The market value of Produce:

  • The market value of the products will also affect the value of forest land.
  • Higher the value of forest produce, higher will be the value of forest land.
  • The qualities of the product will also affect the market value.
  • Growing stock and cost of transportation from the forest area to the market are also important factors.
  • Centrally located areas influence the value of land.

The rate of Interest:

  • Higher the interest charges, lower will be the value of land.
  • Appropriate interest rates may be used while evaluating forest lands.
  • Generally, the rate charged by the state bank on fixed deposits or govt securities is used to evaluate forest land. The securities are also known as gilt edge securities and can be sold/ exchanged in the stock market without any risk.
  • The appropriate rate of interest for forest land is about 8-10%.

Effective rate of interest (E) = [Pure interest (P) + Risk (R)] / [100 – R] × 100



Calculation of Expectation value:

  • Time at the raising of tree crop.
  • Estimation of raising cost at initial years and during rotation period.
  • Work out compounding income at rotation age.
  • Net income
    • All these expenses and incomes will go for an indefinite period.
    • The capital value or worth of a continuing series of a net period income is given.

Vo = a / (1 + p)t – 1

  • Since the interest rate is employed as a measure of the importance of time, this measures that each item must be carried with interest where necessary to rotation age.

Se = a / (1 + p)r – 1

(Where; Se is Soil expectation, a is periodic net incomes, r is rotation age, p is present rate of interest)

(Where; R is income or revenue, c is costs, r-t is the timing of occurrence, r is rotation age)

So, the above formula can be written as;

Thus, Se = Yr + T + ai – Ct – Cf – Ca

(Where; Yr is Final yield revenue, T is thinning revenue and ai is annual selling of minor produce)

  • Se is an index of mgt plan. If the mgt plan is changed the value of Se will also change.
  • This value is the maximum which can be paid for the land. More than this will result in the loss.
  • If the value of Se = 0, the project will become unprofitable or economically unviable.
  • If the value of Se is negative, the project is economically not viable.
  • If the rotation is longer and the rate of interest used is higher, then the Se will be less or decreased.
  1. Market Value Approach:

  • To appraise the market value of a thing, identification of the market where like things are brought and sold is to be done.
  • The market value approach is appraised for:
    • To guide a firm’s selling and buying.
    • To guide a firm in making choices amongst various alternatives.
    • To establish the value of properly or our put for taxation. Appraisal for this purpose is termed as assessment.
    • To estimate damages.
    • To emphasize the importance of neglected resources.
  1. Valuation of growing stock:

  • Growing stock is generally meant by a piece of land with trees of different ages with different diameter classes or the total wood (ie timber + fuelwood) volume whether ready of harvesting or not.
  • When it is desired to determine the value of wood at any age other than its rotation age, (the value obtained) is known as the value of growing stock.
  • There are two methods to determine it:
  1. Cost Approach
  2. Expectation Approach

Cost Approach:

  • In this case, all the costs incurred up to the valuation period are discounted at an appropriate interest rate. The same procedure is adopted for revenue.
  • The net compounded value will be the growing stock: ie

Value = Discounted Revenue – Discounted Cost

  • Eg a plantation with 20 yr rotation. There is some expenditure which will be done during the length or rotation. These costs are calculated for each year up to for example 15 yrs (the final wood, as said, will not be included) and are discounted individually applying an appropriate discount rate; then adding them which will give the total cost.
  • Similarly, there will be revenue coming during this period eg from the sale of thinned material etc.
  • Discount this revenue at the same discount rate. This will be ‘total discounted revenue’.
  • Now the difference b/w the total discounted revenue and the total cost is the value of growing stock at the age of 15 years. Eg Rs 200 (TDR) – Rs 100 (TC) = GS value

 Expectation Approach:

  • By expectation approach, we throw a glance in future.
  • All the costs and revenues are compounded precisely with an appropriate interest rate.
  • The difference b/w the two will give the expectation value of the growing stock.
  • Again the procedure is exactly alike but here the value is calculated at the age of 20 years ie rotation adopting the same interest rate.
  • So values (costs and revenues) right from the first year, 2nd yrs, 3rd yrs, etc to the time when it is ready for harvesting are computed and their difference gives us the requisite value.
  • Limitation: cost approach is only used up to a certain no of years.



WHY IS VALUATION CARRIED OUT?

  • To determine price in the transfer of titles, purchase or sale.
  • To determine properly pledges as security (mainly for the land property).
  • To determine compensation for damages, insurance, settlements, etc.
  • To establish the base for taxes.
  • For managerial purposes.

CAPITALIZATION OR EXPECTATION VALUE:

  • The capitalization approach is to estimate the value of an agent of production by discounting or capitalizing the anticipated net values of it.
  • Its probable net revenues, the resultant capitalized value is termed as expectation value.
  • Valuation of forest land is made by this method.
  • The forest land takes/ derives its value from the growing stock or its productive capacity.

(ANNUITY) ANNUAL PAYMENT:

Accommodation charges, wages of staff, irrigation charges, etc viz, the payment made on annuals is called annual payment.

The Annuity formula:

a = [(1 + r)n – 1] ÷ [r (1 + r)n]

(Where ‘a’ is annual cost or average revenue; r is rate of interest; n is rotation age or no of years).

SOIL EXPECTATION VALUE:

Formula:

Se = a ÷ (1 + r)n

(Where; a is periodic income from a piece of land or periodic attainment from a piece of land; r is the rate of interest, n is no of years ie for how long one going to discount or rotation of particular crop).

STUMPAGE VALUE:

  • Stumpage is the term used to designate, “the value of trees while standing in the forest”.
  • It is an important concept which is applied to the sale of standing wood.
  • It is a term used to designate the volume of merchantable wood standing in a piece of land.
  • Growing stock value was the value of all the wood whether ready for felling or not but stumpage value is only for that wood which is ready for removing.
  • There are different types of harvesting the forest crops eg selection felling, clear felling, and shelter-wood felling. In clear felling, all the wood whether ready or no is included in it but in selection and shelter-wood, only those tree are reckoned which are to be hacked down.
  • Stumpage value is the value of standing timber obtained by multiplying its estimated volume by the stumpage price.

Valuation of Stumpage:

  • Following steps are involved in the valuation of stumpage:
    • Determination of sale price of timber in the market:
      • Species
      • Length and size of timber ie logs, scantlings, etc.
      • Quality of timber
      • Locality
      • Weighted average called average sale price (ASP) is worked out for the whole forest.
    • The cost of production is worked out for the whole forest which includes the cost of labor, other supplies, depreciation, transportation, logging, conversion, etc. Work out the average production cost (APC)
    • Subtract the average cost of production from the average sale price. The product we get is known as conversion surplus.
      • Ie Conversion surplus = ASP – APC
      • Consumer surplus will include the margin for profit and risk.
    • Stumpage value = conversion surplus – profit and risk

Application:

  • Where investment is large
  • Operations are spread
  • A longer period of time



WORKING CAPITAL:

  • It is the summation of total fixed cost (TFC) and variable costs (VC)
  • Eg In an industry the TFC is 20 million, then the working capital is 20 million + electricity charges + labor charges + ……. All are summed and constitute the working capital of the project.

OPERATING COST:

  • The fixed cost is 20 million but operating cost is 10 million for all the miscellaneous items viz electricity, labor, etc.
  • This can also be called variable cost.
  • Machinery is there but for running it we have to purchase some raw material which is not fixed.

RESIDUAL VALUE:

  • Fixed investments or fixed cost usu have some value at the end of their operations. It is known as Residual value.
  • Eg a car which prices one lakh (fixed cost) today. After 10 yrs of use, it is not worthy of 1 lakh but somewhere 30,000, etc. the latter value of a car is Residual value.
  • Eg PFI building constructed now. When we want to dispose of it, the value at that time will be its residual value.

For correction and improvements please use the comments section below.




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Naeem Javid Muhammad Hassani

NJMH is working as Deputy Conservator of Forests in Balochistan Forest & Wildlife Department (BFWD). He is the CEO of Tech Urdu (techurdu.net) Forestrypedia (forestrypedia.com), Majestic Pakistan (majesticpakistan.pk), All Pak Notifications (allpaknotifications.com), Essayspedia, etc & their YouTube Channels). He is an Environmentalist, Blogger, YouTuber, Developer & Vlogger.

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