The Value of a Forest: A Critique of the Groome and Associates IRR Method

Abstract

The Groome and Associates Internal Rate of Return method for estimating the value of a standing forest is compelling in its simplicity. A forest manager need only be aware of current lumber prices, aware of harvesting cost, and able to estimate the average rate of growth in the value of a tree about to be planted. The technique also produces consistent results. Any forest manager should arrive at the same estimate of value for any forest. However, the simplicity of the method disguises several important errors. The age at which trees are harvested influences a forest's value. If trees are cut in the wrong year, the value of the forest is reduced. Determining cutting year is properly an explicit part of estimating forest value, but is excluded from the GA method. By contrast, net present value easily calculates optimal cutting year.