Thursday, July 30, 2015

Upland Resources Valuation Methods

by Anton Antonio
July 9, 2015

There are many unique and peculiar characteristics of the different upland resources which make them relatively hard to valuate.  Identifying a single valuation method to use will most likely result to accuracy in one specific resource but erroneous results for the rest.  It should also be noted that upland resources could also be in the form of intangible services from nature making valuation more challenging.

There are several valuation methods that can be used in combination to come up with a more accurate valuation.  These are…
  1. Income Valuation – The income approach is one of three major groups of methodologies, called valuation approaches, used by appraisers.  It is particularly common in commercial real estate appraisal and in business appraisal.  The fundamental mathematics is similar to the methods used for financial valuation, securities analysis, or bond pricing.  However, there are some significant and important modifications when used in real estate or business valuation.
  2. Cost Valuation – In real estate appraisal, the cost approach is one of three basic valuation methods.  The others are market approach, or sales comparison approach, and income approach.  The fundamental premise of the coast approach is that a potential user of real estate would not, or should not, pay more for a property than it would cost to build an equivalent.  The cost of construction minus depreciation, plus land, therefore is a limit, or at least a metric, of market value.
  3. Stumpage Valuation – A simplified net present value method where the value of the stock is obtained by multiplying the current volume of standing timber by its stumpage price, assuming the rate of discount is equal to the natural growth rate.  Stumpage is the price a private firm pays for the right to harvest timber from a given land base.  It is paid to the current owner of the land.  Historically, the price is determined on the basis of the number of trees harvested, or per stump.  Currently it is dictated by more standard measurements such as cubic meters, board feet, or tons.  To determine stumpage, any stand that will be harvested by the firm is first assessed and appraised through processes aimed at finding the volume of timber that is to be harvested.  A given stumpage rate, measured in amount per volume, is then applied to the amount of timber to be harvested.  The firm will then pay this price to the landowner.
  4. Net Present Value – In finance, the net present value is defined as the sum of the present values of incoming and outgoing cash flows over a period of time.  Incoming and outgoing cash flows can also be described as benefit and cost cash flows, respectively.  Net present value is also defined as the sum of the present values of incoming and outgoing cash flows over a period of time.
  5. Soil Expectation Value – Land expectation value is a standard valuation technique applied to many timberland situations.  Land expectation value calculates the value of bare land in perpetual timber production and is often used to valuate even-aged timber plantations.
  6. Travel Cost Method – The basic premise of the travel cost method is that the time and travel cost expenses that people incur to visit a site represent the price of access to the site.  Therefore, the willingness of people to pay to visit the site can be estimated based on the number of trips that they make at different travel costs.  This is analogous to estimating the willingness of people to pay for a marketed good or service based on the quantity demanded at different prices.
  7. Contingent Valuation Method – The contingent valuation method is a simple, flexible non-market valuation method that is widely used in cost-benefit analysis and environmental impact assessment and environmental impact statement.

Again, a combination of these methods will give better results than choosing to use only one of these upland resources valuation methods.

Just my little thoughts…

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Cruz, C. A. and Calderon, M. M. (2000). “Economics of Upland Resources”. University of the Philippines Open University, Los BaƱos, Laguna, Philippines

1 comment:

  1. What is the best resource for determining a pre-money valuation of a company?