What does the Rate
of Return (ROR) mean?
Rate of return is a
measure of how productive an investment is, expressed in percentage terms. For
example, if you bought $100 worth of trees and they grew in value to $110
after 1 year then the rate of return would be 10%. The board foot dollar
values of logs used to generate the information presented on this site are
from The Pennsylvania
Woodlands Timber Market Report.
What do the ROR
calculations assume?
It assumes a price
increase that is based only on a 3 % constant inflation rate. If you expect inflation to be higher than 3% then the ROR would be larger than
calculated and if you expected the inflation rate to be lower than 3% then the
ROR would be lower than calculated. Similar, conclusions would be made if you
expected the real price of trees to grow faster or slower than inflation.
How should I use
the ROR information?
Rate of return
information can be used to compare growing trees as an investment with other
investment opportunities. Ideally, the investment options should be comparable
in length and have similar amounts of risk. As a first approximation, you
might compare the 10 year ROR from growing trees to the ROR from a 10 year Certificate
of Deposit at your bank.
How do
differences in risk affect my comparisons?
Higher levels of
risk are usually associated with higher expected ROR. For example, if you were
comparing two investment opportunities and one was riskier than the other,
most people would require a higher expected ROR on the riskier alternative.
Growing trees is generally thought to be low risk but not risk free. There is
risk associated with weather, wildfire, insects and diseases. This risk
depends on the trees being grown and the site - hence you should contact your
forester to get a better appreciation of the risk associated with growing your
trees.
In order to compare
how rate of return changes with tree size, quality, species, and stand
treatment go to Rate of Return &
Trees.
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