Wealth accumulation in rotation forestry - Failure of the net present value optimization?

Area of Science:

• Economics
• Financial Mathematics
• Economic Modeling

Background:

• Understanding wealth accumulation and capital return is crucial for economic analysis.
• Existing models often rely on specific yield functions and objective functions.
• The impact of different optimization strategies on financial outcomes requires further investigation.

Purpose of the Study:

• To present an expression for the momentary rate of capital return.
• To compare different yield functions and economic objective functions in wealth accumulation.
• To evaluate the financial consequences of various optimization procedures.

Main Methods:

• Derivation of an expression for the momentary rate of capital return.
• Application of three distinct yield functions (two literature-based, one growth-model-parametrized).
• Comparison of wealth accumulation rates using standard and alternative economic objective functions.

Main Results:

• Direct optimization of the wealth appreciation rate consistently yields superior outcomes.
• Maximizing the internal rate of return provides results only marginally inferior to direct optimization.
• Maximizing net present value with an external discounting interest rate can lead to arbitrary and potentially devastating financial results.

Conclusions:

• The choice of optimization strategy significantly impacts wealth accumulation and financial outcomes.
• Direct wealth appreciation optimization is the most robust method.
• Careful consideration of objective functions and interest rates is essential to avoid severe financial risks.