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Evaluating the financial performance of novel tree species for forestry and agroforestry projects in Fiji and Vanuatu
Book chapter

Evaluating the financial performance of novel tree species for forestry and agroforestry projects in Fiji and Vanuatu

Steve R Harrison
Promoting sustainable agriculture and agroforestry to replace unproductive land use in Fiji and Vanuatu, pp.38-51
ACIAR Monograph, MN191, Australian Centre for International Agricultural Research
2016
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Abstract

Forestry Sciences
This paper examines the application of investment project analysis (IPA) to small-scale plantations of novel tree species in areas of degraded or underutilised land in Fiji and Vanuatu. Growing a small woodlot or agroforestry stand can be considered as a type of investment project. Because tree species can take many years to generate income, application of discounted cash flow (DCF) analysis is appropriate. This paper concerns the application of DCF analysis from the perspective of IPA, as distinct from social cost-benefit analysis (CBA). In IPA, relevant cost and revenue items for the landholder are identified, and annual net cash flows (annual project revenue less capital outlays and operating costs, for the difference between the with-project and without-project cases) are computed over the project life, which depends on the longest species harvest age. In evaluating the financial acceptability of a forestry or agroforestry project, the performance criteria of net present value, internal rate of return, peak deficit and payback period are useful. Some topics treated in detail include: constant versus current price analysis, the concepts of opportunity costs and sunk costs, determining the discount rate, cash flow variables that are most difficult to estimate (including work rates, labour costs, plant protection costs, market and farm-gate product prices, yield estimates or yield curves, post-harvest processing needs and costs) and testing the financial model (verification, validation and sensitivity analysis). A distinction is made between returns to capital and to other resources (particularly labour and land). An example of a Microsoft Excel spreadsheet for a particular forestry species (Flueggea flexuosa or poumuli) is presented and some of the important spreadsheet formulae explained. A reliable evaluation of the costs and returns to growers from investment in agroforestry is critical for developing policies to support agroforestry. Conversely, CBA would be appropriate to determine what level of expenditure is justified to support agroforestry expansion from a social or national perspective. This would require estimation of the broader social costs and benefits of agroforestry expansion for timber andfood production but also social and environmental benefits (e.g. protection or improvement of riparian and coastal areas).

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