Integrating fire risk into the management of forests
Pedro Cosme da Costa Vieira
In a standard cash-flow data-sheet analysis, the quantification of the impact of exogenous variables and management decisions on the investment’s Net Present Value is limited to only a few scenarios. This perspective is insufficient for an efficient risk management in complex business environments. In this work, I present a dynamic programming model that takes into consideration fire risk. Having applied the model to forest management, I conclude that when fire risk increases, it is optimal for the manager to increase the area used per tree and the cut-off weight of stems. Rather than increasing the business Expected Net Present Value (that, with real interest rate of 3%/year, is between 1.5€/m2 and 2.2€/m2), the optimal strategy decreases the business risk. Additionally, I conclude from the model that there is no private incentive to carry out fire risk prevention.
Risk Management, Project Evaluation, Expected Net Present Val
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