OK, here are some topics for future research.

1. MARGINAL VALUE. This is an economic concept. We need a better understanding of this. A very simple example is if one tree is removed from or added to a woodland stand there may be no marginal value. Who cares? Would it be missed? Probably not. Will it effectivey reduce or increase the environmental performance of the stand? Proably not. But if 10% of the stand is lost or added, maybe there is marginal value.

OK, so can you take that zero marginal value of 1 tree/large stand and apply it to a single tree in a landscaped yard? Of course not. This tree is marginal to a much smaller base. Maybe it's the entire base.

These differences are intuitively reflected in the Location Factor in RCM & TFM, but they might be better understood and more effective if explained in terms of marginal value with an academic and theoretical basis.

2. DISCOUNTED BENEFITS STREAMS could consider factors such as risk of failure, risk of disease mortality, differential maintenance costs, etc. Tree A is a white oak 100% in all respects with long remaining life expectancy. Tree B is an American Elm 100% in all respects with a long remaining life expectancy EXCEPT for the possibility of DED. How should the value difference be determined? What penalty should be applied. The key issues are risk and time. What if a DED control program reduces risk but creates a differential expense as compared to Tree A? Again it's an issue of discounting for risk and the differential expense over time. Well established Discounted Cash Flow (DCF) and risk discounting procedures can provide a rational basis for value adjustments. While we don't have good cash equivilants of annual benefits we should be able to create models which provide guidance for meaningful Species or Condition %age adjustments.

SUMMARY. The underlying issue here is that the technical TREE stuff must be merged with the monetary VALUE stuff. Value is a human perception. It's related to anticipated benefits over time. Value estimates must be developed and presented in rational monetary/economic terms. A bunch of tree people deciding what they think trees are worth based purely on technical issues doesn't cut it.

Reply to post by Scott Cullen, on August 20, 1999 at 09:06:06:

Boy, you just keep coming up with this stuff...

1. Marginal value, as you indicated, is something that seems intuitive to the process, when you think about it. Although I don't think I ever used the term, I have certainly applied the concept numerous times. One tree in a group is worth less than that same tree standing alone, where it then has to assume the duties (providing benefits) of the others that aren't there. So this isn't new, just a definition of what we've probably been doing. I need to understand this more.

2. Discounted Benefits Stream- how would you define this? Your example leads me to grasp the basic concept, but I'm not sure I understand what it really means. It must be useable for more than just tree-to-tree comparison. How would you apply it in practice?

Reply to post by Russ Carlson, on August 20, 1999 at 09:06:06:

"Boy, you just keep coming up with this stuff.."

Just scratching the surface Russ, so many underlying and supporting concepts, so little time!

Marginal value will have to wait until I can do some in depth research.

DCF deals with the time value of money. If you are willing to pay $1 for a tree today that will bear $1 worth of fruit, you break even, it's an OK deal. But if it won't bear fruit for another year you really can afford to pay less. If not for ten years a lot less.

If you can buy a tree that will bear fruit anually and the crop will be worth $1 a year and let's say it has a life of ten years, what will you pay for it? You'll get $10 worth of crop but you'll have to wait for each year's increment.

DCF allows you to put a value on that income stream by discounting each year's income based on the years to wait and a selected discount rate (typically what you could earn on the money invested elsewhere, but that's another whole topic).

So if we impute that a tree provides x benefits a year and we project a lifespan we can run a DCF to arrive at Present Value, based simply on the time value of money. That's essentially what CityGreen (TM) and QuantiTree (TM) do. If you want a heavy read take a look at Greg McPhereson's USDA FS Chicago Urban Forest Climate Study, same thing.

If we have a tree that has some risk of not reaching "normally" anticipated lifespan we can additionally discount for the risk of the income stream being interrupted.

A real world example: income producing real estate is often valued using DCF. Projected income over a holding period is discounted to the present to determine Present Value. See the "Income Approach to Value" thread above for some additional detail.

There's a whole wide world out there besides CTLA.

Reply to post by Scott, on August 20, 1999 at 13:27:09:

It sounds like this is not too much different, at least in application, to the Compounded Cost method. I understand the basic concept of where the figur4es come from are different, but isn't this still projecting todays maoey to a future time at a predetermined rate? The factors considered may be different (where the intial costs come from), but the effect is to extrapolate current worth of money to a future point.

Reply to post by Russ Carlson, on August 20, 1999 at 19:43:17:

Actually it's the direct inverse. The result of Compounding is Future Value or FV. The result of Discounting is Present Value or PV.

Both can use either a single cash flow or a series or stream of flows. Both can use cash inflows or cash outflows, but more typically DCF uses inflows. Actually DCF uses net inflows which requires considerations of outfloes, but the net is what is discounted.

Compounding of inflows is used in calculations of compund interest as in zero coupon bonds. There is a Reinvestment Assumption inherent in the calculation: Both the entire initial principal investment and all interest inflows remain invested. Each individual inflow is reinvested at the compounding rate. If interest income is taken out or the initial rate cannot be obtained, the calculation is flawed.

Compounding in CTLA tree appraisal muddies things up. The Cost is an outflow which is treated as a principal investment. Subsequent costs for establishment are similarly outflows treated as principal investment. Periodic maintenance costs are really outflows and if compounded they are mishandled. It gets further confused because you are calculating a FV and attempting to use it as a PV. The cost inputs may be wrong... PV, the value today might or not be compounded investment but it would be investments made in the past leading to a FV today to perhaps be equal to PV.

But there is more than a computational problem. Compounding just keeps building a bigger and bigger number. You're sort of guessing how long to compound to get to a value estimate. The problem is that a tree, unlike a monetary investment has a limited life. At some points it starts to depreciate. It's value curve reaches a peak and then declines. A compounding curve is ever upward.

In traditional forest valuation compounding is used to carry costs or outflows forward so you know the total of cost... both cash outlays and the cost of money. The result is sometimes referred to as "Cost Value." But it has no relationship to the value of the forest or the crop, just to your expenditures. The value of the crop or forest is either market value or the PV of future benefits at the date of valuation. The reason foresters calculate "Cost Value" is to constantly compare to projected market value so informed management decisions can be made about how long to invest in and manage a stand before harvesting. You want to earn at least what you spent, or less so you have a profit.

Forest valuation may be one of the original sources of Compounding in CTLA methods, but the standard forest valuation texts from about WWII onward are clear that compounding is only half the equation. The more important half is the comparision to benefits value. Discounting is a much better tool for calculating benfits value. (Chapman & Meyer, 1947. Forest Valuation. NY: McGraw-Hill. P.v.)

Survival of compounding in the 90 years or so before WWII was ill-informed. The German and Austrian sources of the mid to late 19th century employed discounting. (Faustmann's Formula is generally cited as the source of today's Land Expectation Value LEV method for timberland.) But an English surveyor (appraiser) determined more than 200 years earlier that beyond a certain age a timber harvest could not recoup compounded costs and that discounting should be used to value a future harvest.

This is an on the fly precis of an unfinished article of mine: "Tree Appraisal: Does Cost Compounding Make Sense?" The simple answer is NO. The article so far is about 45 pages plus notes and citations. Much of that is explanation of underlying concepts but there is a lot more explanation that provided here about why it does not make sense. Some of the big issues mentioned above are Timing, the Reinvestment Assumption, and Limited Asset Life.

As I said in another post, if it sounds complex it's because it is. Compounding - like discounting - should only be employed if you have a thorough understanding of all the issues.

Scott

Reply to post by Scott Cullen, on August 20, 1999 at 09:06:06:

OK, here's another topic. OBJECTIVE and SUBJECTIVE get bandied about quite a bit but is there a really clear understanding of what they mean? Try looking them up and I think you'll find there's some variation. Try looking in Black's Law Dictionary - those of you who do expert testimony - and you'll be suprised how limited the treatment is as well as what it is.

And I think ARBITRARY is often confused for and subsituted for truly Objective. Just because you pick something from a standardized list and everybody has the same list does not mean the result is Objective. Just because results vary does it mean they are not Objective?

This applies not only to Valuation but to all investigations. It's quite topical right now on the UKTC site in there debate on SRA.

Reply to post by Scott Cullen, on August 20, 1999 at 09:06:06:

Add to the list the sequence of depreciation adjustments. See "More Thoughts" @ 9/08/99 (638) below.