AGRICULTURAL UNIVERSITY OF TIRANA FACULTY OF FORESTRY SCIENCES DEPARTMENT OF FORESTRY Approved Dean

____________________________ Prof. Asoc. Dr. Leonidha PERI

Course Syllabus “ Forest business economics and Forest Valuation” “Forest business economics and Forest Valuation”is part of the curriculum of the Bachelor of Science Study Program offered by the Department of Forestry of the Faculty of Forestry Sciences. This course is part of the integrative teaching modules of the study program and compulsory for all in the study program enrolled students.

Module Coordinator

Prof. Asoc. Leonidha PERI

Head of Department Prof. Dr. Vath TABAKU

June 2016

CONTENTS

1. INTRODUCTION

3

1.1 General information on the course

3

1.2 Description of the course contents

3

1.3 Course objectives and students learning outcomes

4

1.4 Descrition of the course teaching and learning activities

4

1.5 Assumed knowledge backround of the students

5

1.6 Prerequisites for final examination

6

2. CLASSES TENTATIVE SCHEDULE

7

3. COURSE OUTLINE

9

4. SEMINAR CLASSES TENTATIVE SCHEDULE

11

5. LITERATURE

14

1. Introduction 1.1 General information on the course Course Coordinator Lecturer Location E-mail Course Website Semester Contact hours/week ECTS

FOREST BUSINESS ECONOMICS AND FOREST VALUATION Prof. Asoc. Leonidha PERI Prof. Asoc. Leonidha PERI [email protected] https://sites.google.com/a/ubt.edu.al/leonidha_peri

i pestë 2/1,5 5 (pesë)

1.2 Description of the course contents “Forest business economics and Forest Valuation” is an integrative teaching module part of the curricula of the "Bachelor of Sciences Study Program" - Profile: Forest Management, offered by the Departament of Forestry at the Faculty of Forestry Sciences. The course has a teaching workload of 3,5 contact hours/week, which are reflected in 30 lectures and 23 practical hours for a duration of 15 weeks during the winter semester. The course is organized in 9 (nine) themes, whom topics are addressed in separate lectures. Main themes and topics of the course are listed below: Introduction to the forest business economics – Scarcity, economic activity and oportunity cost concept; Peculiarities of forest business; Capital budgeting and investment analysis in forestry static capital budgeting criteria, cost comparison method, profit comparison method, rentability comparison method, payback period method, dinamic capital budgeting criteria, Net present value, Internal rate of return, Equivalent Annual Income (Annuity) method; Forest business system of economic objectives - Definitions, elements of the system of economic objectives, formulation of economic objectives; Forest enterprise as business unit - Definition and main aspects; constituive decisions (legal forms) in forest enterprises; Economic impacts of the legal form; Location and impacts of economic environment for the forest enterprise; Typologie of forest enterprises; Acquisition of production factors as a function of forest enterprise - Definitions and tasks, optimization aspects of raw materials management; problematic of production factors acquisation in forest enterprises; Production processes in forest enterprises - Basics of production and cost theory, production function of type A and B, neoclassical cost functions, economic aspects of production processes in forest enterprises; Products sales as a function of forest enterprises - Definitions and tasks, factors influencing the product sales, phases and organization of sales processes in forest enterprises; Financing of economic activity in forest enterprises - Financing forms, internal, external and selffinancing, financing of public and private forest enterprises, investments financing in forest enterprises; Forest valuation - Basic concepts of valuation, Valuation of forest bare land, Faustmann formula (LEV or SEV), stumpage valuation, forest stand valuation by replacement costs and capitalized future incomes, valuation of collections of stands;

1.3 Course objectives and students learning outcomes Forest Business Economics and Evaluation is a discipline that studies the production, distribution, and consumption of forest products and services. It deals with study of the choices related to forest management or conservation. This course is aimig to give the students the necessary knowledge to enable them to analyze the economic activity of a forestry business in compliance with specific goals and objectives. Another objective of this course is to expose the students to issues involving forest valuation in order to understand basic concepts of valuation and be able to carry out valuation processes of forest land and forest stands using the classical forest valuation methods. At the end of the course the students should:  Understand the key economic concepts of scarcity, efficiency, opportunity cost and how its affect our economic decisions  Know and understand the key concepts of financial math (interest rate, simple vs. compound interest, basics of compounding and discounting)  Understand the peculiarities of the forest business distinguishing forestry from other industries and their implications for the economic analysis  Understand the concept of investment and being able to conduct analysis of forest investments using the methods learned  Understand the functions of forest enterprises and how economic factors affect these functions  Be able to analyze forest production activities applying theoretical framework of production and cost theory  Understand basic concepts of valuation and the main methods of forest valuation 1.4 Descrition of the course teaching and learning activities Teaching and learning activities of the course include lectures, seminars, a course work, midterm exams and the final examination.  Lectures will be scheduled with a weekly teaching workload of 2 hours (60'). Teaching materials will be distributed to the students in the beginning of the classes. Powerpoint presentations used by instructor during the lecture classes will be accessible to the students in the course website.  For the most of the lecture topics the practical aspect will be materialize in 15 (fifteen) exercise hours. More important than the exersices solutions will be the interpretation of the results based on the theories and other theoretical tools.  During the seminar classes (5 hrs) will be discussed some of the most important topics of the lectures themes. The discussion will aim the critical evaluation of the knowledge transmitted and not its simple reproduction.  Knowledge assessment will be done first during the exercises and seminar classes and through two midterm exams.

 The midterm exams will be focused on the topics of several course themes and are aiming to assess students learning according to the learning objectives of the course. The first midterm exam will be focused on the topics of the themes I, II, III of the lectures and the second one on the topics of the IV, V, VI, VII, VIII lecture themes  The course program foreseen a course work. The students will be divided in working groups of 12 students, and each group/student has to evaluate (accept or reject) an investment alternative according to dinamic capital budgeting criteria, like Net Present Value and Internal Rate of Return  Solution and presentation tips will be given to the students separately in the beginning of the seminar classes and will be accessible in the course website.  The course work will be graded based on the procedure foreseen in the faculty internal studies regulation for the course work. Submission and acceptance of the course work is a prerequisite for the final examination.  The final examination is the most important element of the performace assessment of the student and includes 60% of the grading and will be a written exam. The student will be informed on the structure of the final examination in the beginning of the classes.  The grading policy of the course is given more detailed in the table 1. Tabela 1. Grading policy Nr. 1 2 3 4 5

Grading assignments Active participation Course work Midterm exam (2 x 10%) Final examination Total

% 10% 10% 20% 60% 100%

Points 10 10 20 60 100

Refering to the FoFS internal studies regulation, in the table 2 is given the grading scale according to the point's intervals achieved by the students at the end of the course. Tabela 2. Achieved point intervals and grading scale No. 1 2 3 4 5 6 7

Points intervals 0-44 points 45-54 points 55-64 points 65-74 points 75-84 points 85-94 points 95-100 points

Grading scale 4 5 6 7 8 9 10

1.5 Assumed knowledge backround of the students The course presumes a solid understanding of Silviculture, Forest Management and Forest Harvesting. Having a solid understanding of quantitative aspects of biological and mechanical forest production processes is a must to analyze and evaluate their economic impact.

1.6 Prerequisites for final examination The students must attend 50% of the lectures classes and 80% of all seminar classes. The course work must be submitted within the deadline set by the course instructor. Late assignements will not be accepted. Acceptance of the course work is also a prerequisite for granting the final examination.

2. Classes Tentative Schedule Week

Week 1

Week 2

L/S/E/ CW

L

Scarcity, human needs and economic activity

L

Relative and absolute scarcity concept

U

Understanding the time value of maney. Calculating the simple interest

L

Opportunity cost concept and decision - making process

L

Nature and scope of forest business economics

U

Calculation of compound interest

U

Compounding and discounting payment series

L Week 3

L U L

Week 4

L U

Week 5

Peculiarities of forestry and forest business and the impact for the economic activity Investment concept. Investment types. Models and methods of investment appraisal.

L

The average rate of return method. The static payback method

L

Static methods of investment appraisal. Net Present Value Peculiarities of forestry and forest business and the impact for the economic activity Internal rate of return. Annuity Method. Critical overwiev of the methods of investment appraisal

L

Economic activity objectives system

U

The cost comparison method

U

The profit comparison method

Economic objectives system elements. Operacionalization of the economic activity objectives Forest enterprise as business unit. Constituive decisions (legal forms) L in forest enterprises U The average rate of return method. The static payback method Organization and existentence aspects. Rentability and productivity L Decisions on the legal form and its implications for the economic activity Typology of forest enterprises. Location and impacts of economic L environment for the forest enterprise ME Knowledge assessment related to topics of themes I, II, III U Net Present Value Method Acquisition of production factors as a function of forest enterprise. L General aspects. Problematic of production factors acquisition in forest enterprises L

Week 7

Week 8

Week 9

Week 10

Written lectures, handouts, .ppt presentations Written lectures, handouts, .ppt presentations Written material on the topic Written lectures, handouts, .ppt presentations Written lectures, handouts, .ppt presentations Written material on the topic Written material on the topic Written lectures, handouts, .ppt presentations Written lectures, handouts, .ppt presentations

Written material on the topic Written lectures, handouts, Static methods of investment appraisal. The cost comparison method .ppt presentations Written lectures, handouts, The profit comparison method .ppt presentations Declining balance method and Sum-of-the-years'-digits method. Written material on the topic Straight line method according to capacity use

Scarcity and opportunity costs as fundamental economic concepts

L

Teaching/learning materials

Depreciation. Straight line method

S

S

Week 6

Lectures topics

Written lectures, handouts, .ppt presentations Written lectures, handouts, .ppt presentations

Written lectures, handouts, .ppt presentations Written lectures, handouts, .ppt presentations Written lectures, handouts, .ppt presentations Written lectures, handouts, .ppt presentations Written lectures, handouts, .ppt presentations

Written lectures, handouts, .ppt presentations Written lectures, handouts, .ppt presentations

Written lectures, handouts, .ppt presentations Written lectures, handouts, .ppt presentations

L

Basics of production- and cost theory

U L

Internal Rate of Return Methods Bilogical and mechanical production in forestry. Economic aspects of Written lectures, handouts,

U S

.ppt presentations forest production processes Economic optimization of species selection for afforestation. Optimal Written lectures, handouts, .ppt presentations forest rotation. Basics of Faustmann model Annuity Method Structural characteristics decisions (legal forms) in forest enterprises

L

Optimization of harvesting. Optimization of thinnings and pruning

L

Week 11

Week 12

Selling as a function of forest enterprises - Definitions and tasks, factors influencing the selling Written material CW Course work Financing of economic activity in forest enterprises - Financing forms, Written lectures, handouts, L internal, external and self-financing, financing of public and private .ppt presentations forest enterprises L

L S S L

Week 13

Week 14

Week 15

Written lectures, handouts, .ppt presentations Written lectures, handouts, .ppt presentations

L

Written lectures, handouts,

Value and valuation basics. Reasons and principles of forest valuation .ppt presentations Economic aspects of forest production Economic aspects of forest production Valuation framework in forestry. Substance value and future value - Written lectures, handouts, .ppt presentations Competitive valuation concepts. Valuation of forest land. Land rent theory. Faustmann formula

ME Knowledge assessment of the topics of themes IV, V, VI, VII, VIII Forest stands evaluation. Stumpage value method and consumption L value method Replacement cost appraisal method. Capitalized income appraisal L method U Land rent theory. Faustmann formula Stumpage value method and consumption value method, U Replacement cost appraisal method. Capitalized income appraisal method L

Valuation of groups of forest stands

L

Critical view of the classical forest valuation methods

Valuation principles. Substance value and future value. Competitive valuation concept DK Submission of the course work S

Written lectures, handouts, .ppt presentations Written lectures, handouts, .ppt presentations Written lectures, handouts, .ppt presentations

Written lectures, handouts, .ppt presentations Written lectures, handouts, .ppt presentations

3. Course outline Theme I

Introduction to the forest business economics

1.1

Scarcity concept. Definition, meaning and forms

1.2

Economic activity aspects. Efectivity and eficiency

1.3

Opportunity cost and their importance for decision making process

1.4

Nature and scope of forest business economics

1.5

Peculiarities of forestry and forest business. Impacts for the economic activity

Theme II

Investment appraisal methods

2.1

General overview. Definitions and investment types

2.2

Static methods of investment appraisal

5 hrs

6 hrs

2.2.1 Cost comparision method 2.2.2 Profit comparision method 2.2.3 Avarage rate of return method 2.2.3 Static payback method 2.3

Dynamic methods of investment appraisal

2.3.1 Net Present Value 2.3.2 Internal Rate of Return 2.3.3 Annuity method 2.4

Critical view of the investment appraisal methods

Theme III

Economic activity system of objectives

3.1

Definition and meaning

3.2

Elements of the system of economic objectives

3.3

Opracionalization and formulation of economic activity system of objectives

Theme IV

Forest enterprise and constituive decisions

4.1

Definition and main aspects of an enterprise

4.2

Legal form decisions and impact on the economic activity

4.3

Typology of forest enterprises

4.4

Economic environment and its impact on the economic activity

Theme V

Acquisition of production factors

5.1

Acquisition principles

5.2

Optimization of the production factors acquisition process

5.3

Problematic of production factors acquisition in forestry

2 hrs

4 hrs

1 hrs

Theme VI

Production as a function of the forest enterprise

6.1

Production- and cost theory basics

6.2

Production forms in forestry. Sustainable forest management principle

6.3

Economic aspects of selected forest production processes

Theme VII

Selling as a function of the forest enterprise

7.1

Definition and functions

7.2

Factors influencing products selling

7.3

Organization of selling processes

Theme VIII

Financing of economic activity as a function of forest enterprise

8.1

Financing forms. Internal, external and self-financing

8.2

Financing of public forest administration

8.3

Financing of private forest enterprises

Theme IX

Forest Valuation

9.1

Basic concepts of value and valuation

9.2

Principles, reasond and framework of forest valuation

9.3

Substance value and future value - Competitive valuation concepts.

9.4

Classical forest valuation methods

9.4.1 Forest land valuation. Land rent theory. Faustmann formula 9.4.2 Forest stand valuation with the cost replacement appraisal method 9.4.3 Forest stand valuation with the stumpage/consumtion value method 9.4.4 Forest stand valuation with capitalized income appraisal method 9.4.5 Valuation of groups of forest stands 9.4.6 Critical view of classical methods of forest valuation

4 hrs

1 hrs

1 hrs

6 hrs

4. Seminar classes tentative schedule WEEK 1 TIME VALUE OF MONEY DESCRIPTION TOPICS TO BE DISCUSSED EXERCISES

TOPICS - What do you understand with interest and interest rate? - How it's calculated the simple interest ? - Practical aspects of interest calculation ? Calculation of simple interest

HRS 1

WEEK 2 TIME VALUE OF MONEY DESCRIPTION TOPICS TO BE DISCUSSED

EXERCISES

TOPICS

HRS

- What is meant with "compound interest" ? - What is discounting and compounding ? - How it's calculated the compound interest/future value and a presnt value ? - What are annual/periodic/perpetual payments series ? - discounting and compounding of payment series - Calculation of a future value/present value - Calculation of the rate of interest - Calculation the future and the present value of annual/periodic/perpetual payments series

2

WEEK 3 DEPRECATION DESCRIPTION TOPICS TO BE DISCUSSED EXERCISES

TOPICS - Factors causing the deprecation - Why is calculated the deprecation ? - legislative and accounting aspects of deprecation ? - Straight line method Calculation of deprecation according to straigh line method

HRS 1

WEEK 4 DEPRECATION DESCRIPTION TOPICS TO BE DISCUSSED EXERCISES

SEMINAR

TOPICS - Declining balance method. Sum-of-the-years'-digits method. Straight line method according to capacity use - Calculation of deprecation with the above mentioned methods Scarcity and opportunity cost as fundamental concepts of economics - Understanding of scarcity and economic activity - What is meant with "economic activity" - What are scarcity forms - The meaning of the economic principle? - Definition and meaning of "opportunity costs ? - Opportunity costs and economic decision-making

HRS 1

1

WEEK 5 PECILIARITIES OF FORESTRY DESCRIPTION TOPICS TO BE DISCUSSED SEMINAR

TOPICS - What are the peculiarities of forestry? - Economic impacts of long forest rotations - Economic impacts of the duality forest tree - timber product - Importance of environmental services of forestry Peculiarities of forestry and impacts on the economic activity of forest businesses

HRS

1

WEEK 6 STATIC METHODS OF INVESTMENT APPRAISAL DESCRIPTION TOPICS TO BE DISCUSSED

EXERCISES

TOPICS - Cost comparision method aspects - Calculation formula - Profit comparision method - cost classification and their importance on the business decision-making - Impact of production capacity on the investment costs - Calculation formula of the profit comparision method - Ushtrime për llogaritjen e një investimi me metodën e krahasimit të kostos - Aspekte sasiore dhe cilësore të llogaritjes së investimit - Ushtrime për llogaritjen e një investimi me metoën e krahasimit të fitimit

HRS

2

WEEK 7 STATIC METHODS OF INVESTMENT APPRAISAL DESCRIPTION TOPICS TO BE DISCUSSED

EXERCISES

TOPICS - Definition of rentability? - Avarage rate of return methodology - Static payback methodology - What is "payback time" ? - Problematic of "the payback time" criteria of investment appraisal - Evaluation of an investment with the average rate of return method - Evaluation of an investment with the static and dymanic payback method (taking into account the deprecation)

HRS

1

WEEK 8 DYNAMIC METHODS OF INVESTMENT APPRAISAL MIDTERM EXAM DESCRIPTION

TOPICS

- Net Present value criteria - What is the meaning of the "net present value" TOPICS TO BE - Calculation of the Net Present Value DISCUSSED - The effect of rate of return to the Net Present Value - Practical methodology of Net Present Value Method - Evaluation of an investment with Net Present Value Method EXERCISES - Evaluation of two investment with Net Present Value Method Knowledge assessment related to Themes I, II, III topics. Students will MIDTERM EXAM answered by writing to 3 questions related to Themes I, II, III topics.

HRS

1

1

WEEK 9 DYNAMIC METHODS OF INVESTMENT APPRAISAL DESCRIPTION TOPICS TO BE DISCUSSED EXERCISES

TOPICS - Menaing of Internal Rate of Return - Relation of the IRR to Net Present Value - Geometrical solution of IRR - Evaluation of an investment with Internal Rate of Return Criteria (using the geometrical solution) - Evaluation of an investment with Internal Rate of Return Criteria

HRS

1

WEEK 10 DYNAMIC METHODS OF INVESTMENT APPRAISAL DESCRIPTION TOPICS TO BE DISCUSSED EXERCISES

TOPICS - Transformation of the Net Present Value into an Annuity - The meaning of the Annuity - Calculation formula of the Annuity method - Evaluation of an investment with the Annuity method

HRS 1

SEMINAR

Constituive decision in the forest enterprise - Definition of "enterprise" ? - What are the most known legal forms of forest enterprises - Impacts of the choosen legal form in the economic activity

1

WEEK 11 COURSE WORK DESCRIPTION

TOPICS

TOPICS TO BE - Explication of the course work methodology DISCUSSED - How the inflation will be dealt? COURSE WORK Course work assignment

HRS 1

WEEK 12 ECONOMIC ASPECTS OF FOREST PRODUCTION PROCESSES DESCRIPTION

TOPICS TO BE DISCUSSED

SEMINAR SEMINAR

TOPICS - Optimal forest rotation ? - Forest stand harvesting age - Optimal forest rotation theories - Optimization of the forest rotation - Optimization of the foretst harvesting - Otimization of thinnings - Optimization of forest trees pruning Economic aspects of forest production processes Economic aspects of forest production processes

HRS

2

JAVA 13 MIDTERM EXAM DESCRIPTION TOPICS TO BE DISCUSSED

MIDTERM EXAM

TOPICS - Constituive decisions in the forest enterprise - Acquisition of production factors - Biological and mechanical production processes in forestry - Selling - Financing the economic activity Knowledge assessment related to Themes IV, V, VI, VII, VIII topics. Students will answered by writing to 3 questions related to Themes IV, V, VI, VII, VIII topics.

HRS

1

WEEK 14 VALUATION PRINCIPLES AND FOREST LAND VALUATION DESCRIPTION TOPICS TO BE DISCUSSED SEMINAR EXERCISES

TOPICS - Valuation reasons in forestry - Valuation priciples to be taken into account ? - What are the valuation framework elements? - The definition of the "substance value" and "future value" - Faustmann formula ? Valuation principles and competitive valuation concepts Calculation of the forest land value using the Faustmann formula

HRS

2

WEEK 15 COURSE WORK DESCRIPTION TOPICS TO BE DISCUSSED

TOPICS

- Checking the accuracy of the solutions - Checkin the presentation form of the assignement COURSE WORK Submission of the course work

HRS 1

5. Literature 1. Speidel, G. (1984): Forstliche Betriebswirtschaftslehre. 2. Auflage. Verlag Paul Parey 2. Schmithuesen, F., et al. (2014): Entrepreneurship and management in Forestry and Wood Processing. 3. Principles of business economics and management processes. Routledge. 4. Wagner, J.E. (2012): Forestry Economics. A managerial Approach. Routledge 5. Price, C. (1989): The theory and the application of forest economics. Basil Blackëell 6. Sagl, W. (1995): Bewertung in Forstbetrieben. Blackëell Ëissenschafts-Verlag. 7. Klemperer, D. W. (2003): Forest resource economics and finance. 2 nd ed. McGraë-Hill, Inc. 8. Buongiorno, J., Gilles, J.K. (2003): Decision Methods for Forest Resource Management. Academic Press, Elsevier Science. 9. Written lectures "Ekonomia dhe Vleresimi Pyjor" for the students of the Department of Forestry 10. PowerPoint presentations used