If you have a variety of NTFC options it may be difficult to decide which to invest in. A cost-benefit analysis (CBA) can be used to clarify the anticipated gains from each. Using a discount rate is helpful in accounting for time and uncertainty when evaluating costs and benefits in the future by allowing you to turn all future values into present value.
First decide what discount rate to use. A high discount rate means that you place less importance on future costs and more importance on present benefits. If, for example, you were to buy a bond for $100 that would be paid back in one year. What is the minimum amount the bond would have to pay in order for it to be worth your money? Suppose your answer is $110. This is to say that you do not feel that there is a big difference between $100 dollars today or $110 dollars a year from now. From this exercise we have learned that you discount rate is 10%.
Below you will find the equation for finding present values where r = discount rate, t = time in years, and FV = future value.
PV = (1+r)-t x FV
The Net Present Value (NPV) is defined as “the sum of present values of annual cash flow minus the initial investment”. Comparing the NPV of various NTFC options can give you a good idea of what you can expect in the future in terms of economic considerations.
NPV = initial investment + cash flow (year 1) x (1+r)-1 + cash flow (year 1) x (1+r)-1 + ...
Cash flow = revenues – costs
CBA can also be used to evaluate intangible values such as the satisfaction you receive from working the land, the value of improving the health of your forest, or the existence value of your property. One approach to the valuation of intangible costs and benefits is to consider how much you would be willing to pay to have a healthy forest or to use someone’s land for NTFC production. Including such benefits in your CBA will provide a more accurate appraisal of each proposed project.