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Economic valuation of forest restoration systems approach to real options for decision making

Grant number: 19/04304-0
Support type:Regular Research Grants
Duration: May 01, 2019 - April 30, 2020
Field of knowledge:Agronomical Sciences - Forestry Resources and Forestry Engineering
Principal Investigator:Danilo Simões
Grantee:Danilo Simões
Home Institution: Faculdade de Ciências Agronômicas (FCA). Universidade Estadual Paulista (UNESP). Campus de Botucatu. Botucatu , SP, Brazil
Assoc. researchers:Magali Ribeiro da Silva ; Vera Lex Engel
Associated scholarship(s):19/11692-7 - Application of real options in models of forest restoration with native species in mixed plantations, BP.TT
19/11699-1 - Incorporation of real options for investment decisions in models with agroforestry systems, BP.TT


The forests investment projects in real assets evaluated through traditional methods, do not allow to contemplate managerial actions that can be demanded during the economic life of these, therefore, they are inadequate to manage real circumstances intrinsic to forest projects. Thus, from the consideration of managerial flexibility in the decision-making process, the discounted cash flow is complemented, contributing to maximize gains or minimize monetary losses. Therefore, because the traditional net present value does not consider the managerial flexibilities, thus, can generate misleading results, the aimed is to evaluate the forest restoration systems with a Real Option Theory approach in a discrete time, to fill failing in the methods traditionally used for evaluations of capital investment project. The traditional cash flows will be projected in line with the specificity of the forest restoration systems to be evaluated, and as a premise, all inflows, and outflows of resources, such as capital expenditure, cultural treatment costs, depletion, resource taxes, between others, necessary components for the construction of these flows. The flexibilities will involve management options, strategic options, and embedded options, in other words, will be valuation of the option to defer investment, option to expand, option to abandon, option to contract, option to restart operations, the option to switch usage, among others, inherent the specificities of forest restoration systems. It will be adopted the binomial model which assumes that the present value of the project subject to risk follows a Geometric Brownian Movement. The binomial tree will be converted into a decision tree by incorporating the real options into the project, weighting the neutral probabilities to the risk of up and down movements. Based on the traditional present value to be calculated and knowing the value of the forest investment project, the expanded present value will be obtained. The expanded present value corresponds to the traditional net present value, assuming a strategy added to the present value of the flexibilities. (AU)