Forestry projects are a form of capital investment with a particularly long time horizon, and as such present an interesting case of capital budgeting. In many countries, plantation forestry has traditionally been the domain of government agencies, e.g. the national Forestry Commission in the UK and the various state forestry services in Australia. Timber was considered to be a critical economic resource but the long production period meant that only governments had the long-term perspective and capacity to enter into forestry investments. This situation has changed markedly in the past fifty years, with probably the bulk of forestry investment in most countries being undertaken by private companies and individuals. The need for the establishment of plantations has been stimulated by decreasing supplies of timber from native forests through unsustainable logging practices, and the withdrawal of large areas from logging because of their being set aside as protected areas, particularly in tropical counties.

An integral component of investment in forestry is the need for financial information about the likely cash flows associated with the establishment, management and final harvest of a plantation. This chapter uses the development of a financial model for forestry investment as a case study of financial modelling. The financial evaluation of forestry projects poses many challenges and this chapter examines the key parameters for forestry appraisal and some of the problems faced by developers of financial models.