Land Expectation Value to Profit Maximization: Re-Examination of the Faustmann Formula

Abstract

By comparing the use of land expectation value (LEV), internal rate of return (IRR), labor wage expectation value (WEV), and profit (PF) in finding optimum rotation age in forest management, it is argued that the four approaches are essentially similar in maximizing the residual value but different in sharing the value from production. In the long run, the residual (loss) is created by all four factors and are shared depending on relative factor markets. Profit maximization is the most general approach as the scale of land, capital, labor and time are considered. If time value of capital becomes more costly, more land will be applied to substitute the time (shortening rotation); if land becomes more costly, longer rotation will be applied to substitute the land (shrinking land holding). If labor is more costly, more land and longer rotation will be applied. Considering the fact that timberland market is becoming active, and the role of entrepreneurs and investors who pay more attention to the scale of land than the rotation issue in land management, LEV approach which treats the scale of land as fixed is no longer appropriate. This chapter argues that PF maximization would be a more general and suitable approach as it can incorporate both scale of land and capital (management input) and time simultaneously.