Capital budgeting applied to Serbian poplar plantations

Abstract

Background and Purpose: Capital budgeting is the process in which a business determines and evaluates potential large expenses or investments. These expenditures and investments include projects such as building a new plant or investing in a long-term venture. In the case of poplar plantations in Serbia, a prospective project's lifetime cash inflows and outflows can be assessed in order to determine whether generated potential returns meet a sufficient target benchmark, also known as "investment appraisal". The purpose of this study is to show relative profitability of alternative courses of action in poplar plantations. Material and Methods: The investigated plantations were established from Populus x euramericana cl. I-214 on different soil types, situated in north-western part of Serbia, with planting spacing 6x3 m, differently aged, mainly for technical wood production. The data used in this study were collected from the management and materials books of the "Vojvodinašume" Public Forest Enterprise, which is the official owner of these stands. All of the plantations are state-owned. At the end the supply chain of poplar wood production is presented. Different capital budgeting techniques and different discount rates are employed to determine which types of poplar plantations, treated as separate projects, will or not will yield the most return over an applicable period of time. Results and Conclusions: The financial effects for sample plot plantations were first evaluated with an external funder prerequisite of 12% discount rate, and continued with different investment appraisal discount rates. For the discount rate r=12%, all tested areas had a negative net present value (NPV). Average internal rate of return (IRR) is 5.63% and payback period is acceptable for the investor at 6% and less. The average benefit-cost analysis amount is 0.36 for all stands with a discount rate of r=12%.