Valuation of Investment on Teak Plantation Establishment on a 15-Year-Rotation for Intending
Small Holders in Nigeria
By
B.O. AGBEJA
Department of Forest Resources Management
University of Ibadan, Ibadan, Nigeria
A Paper Presented at International Workshop on Small-Holder Timber Production Held at
World Agroforestry Centre (ICRAF), United Nations Avenue, Gigiri, Nairobi, KENYA,
29 November to 1 December 2004
============================================================
Summary
This paper examines valuation of Investment on Teak plantation per hectare of land with a view to
encouraging, persuading and sensitizing intending small-holders of timber production on the long term
benefit accruable on fast growing tree species establishment. The objectives are to estimate the costs
involved in the establishment of small scale teak plantation and to evaluate the benefits per hectare on
a -15-year-rotation. These objectives are carried out using measures such as Net Present Value (NPV),
Benefit Cost Ratio (B/C) and Amortization Payment. It is recommended that government at local, state
and federal levels should encourage and persuade small holders of timber production to join the train
of sustainable forest development; foster private investment in tree and forest actions to restore and
maintain healthy ecosystems; and to offer technical and financial assistance or incentives to help
restore and maintain expanse of land under small holder of timber production.
Key words: Valuation, Investment, Costs, Benefits, Small-holding
1.0 Introduction
The valuation of forest resources has been a concern in forestry for quite a long time. However,
most valuation efforts until the 1950s were limited almost entirely to timber compartment of the forest
(Champman and Meyer, 1947;Hiley, 1956). The purpose of valuation is to make the value on each
forest use explicit, and not necessarily to put a total value on nature (Michael, 1995). Various
techniques have been developed over the years to derive the various measures of value that are
appropriate for particular forest valuation situations. There are several comprehensive reviews and
appraisals of these techniques that outline how they can be applied as well as their advantages and
disadvantages (IIED, 1994; Winpenny, 1991). FAO (1995) suggests that forest valuation should always
be attributed only to the commodity studied and to the actual context and situation studied.
Value is the worth of a product or service to an individual or a like-minded group in a given
context, often involving a complex set of relationships (Brown, 1984). All economic values are
anthropocentric by nature; that is they are human-assigned. A value according to Barbour (1980) is a
general characteristic of a thing or a circumstance that a person views with favour, believes is
beneficial, and is disposed to promote. Values are not held in isolation but as component of a value
system, or ordered set of values.
Investment is the act of producing or purchasing goods that are not for immediate consumption
(Lipsey and Chrystal, 1999). This corroborates a-15-year rotation teak plantation used for this paper.
Investment demand function shows a negative relationship between the quantity of investment per
period and the interest rate, holding other things constant. The volume of teak investment will depend
partly on the rate of interest, business trends and profit expectations.
Forestry is a business. However, ownership issue, investment, revenue generation and
government policies have impacted forestry in Nigerian economy (Agbeja, 2002).Therefore, most forest
lands are regarded as public property (FORMECU, 1993). Public holdings pose the problem of what to
maximize. Forestry projects are capital intensive and capital used is not costless most especially if
borrowed from the bank for investment.
Teak Plantation is a productive economic activity that produces benefits in the form of goods
(timber, poles, etc.) and services (amelioration of microclimate, watershed, reduction of soil erosion,
provision for shelter and shade, etc.). In teak plantation, the economic crops being produced are
homogeneous, species are selected to suit the object of management; growth is rapid and there is a
relatively rapid turn over with quick and high returns on investments per hectare. However, teak
plantation involves costs in the form of materials consumed and the time of productive factors like land,
2
labour, capital diverted from other useful employment. According to Worrel (1970), a comparison of
these benefits and costs gives information for policy decisions on alternative use of land.
A consideration of benefits and costs leads to basic economic criterion of whether the teak
project should be accepted or rejected in respect of financial and social gain of resource utilization from
the stand point of the society. An activity should not be undertaken unless its total benefits (revenue,
employment, stability, etc.) exceed its total costs.
2.0. Teak Plantation Techniques
The following techniques are usually carried out for teak plantation establishment and each technique is allotted
cost as seen in table 1:
i. Site Preparation
- Demarcation
- Blocking
- Brushing
- Felling
- Burning and Packing
ii. Preparation for planting
- Supply of Pegs
- Peg Transportation
- Lining and Pegging
- Potted seedlings/ Transport
iii. Planting and Replanting/Beating-up
-Planting of potted seedlings
-Replanting
iv. Maintenance (Tending operations)
-1st weeding
- 2nd weeding
- 3rd weeding
- 1st Fire tracing and clearing of rides
- 2nd Fire tracing and clearing of rides
- 3rd Fire tracing and clearing of rides
3
2.1. Dimension of 1 Hectare
1 Hectare = 100 m x 100 m
Espacement for teak = 2.5m x 2.5m (Standard spacing)
Total number of seedlings per hectare is derived as follows:
1 hectare
Spacing for planting teak seedlings
= 100m x 100m
2.5m x 2.5m
=1600 seedlings
Total number of seedlings per hectare = 1600 seedlings
1600 seedlings represent the full stock per hectare of land.
Table 1: Costs of Operation for the Establishment of a Hectare-Teak Plantation
Estimate for Physical Inputs: Direct Labour Establishment of a Hectare- Teak Plantation
S/N
1
Operation
Land Preparation
Demarcation of land and
blocking
Brushing of land
Felling of trees
Burning of debris and Packing
Sub-Total
2
Man days
5 man days @ N800
for 4 days
10 man days@ N 800
for 2.5 days
2 man days@ N 800
for 5 days
5 man days @ N 800
for a day
Cost for a Hectare
in Naira Value (N)
N 16,000: 00
N 20,000: 00
N 8,000: 00
N 4,000: 00
N 48,000: 00
Planting Preparation
Supply of 2,000 pegs
Supply of 1600 potted teak
seedlings
A peg a@ N 5
A potted seedlings @
N 50 each
N 10,000: 00
N 80,000: 00
N 25,000: 00
Supply of extra 500 potted teak
seedlings for Beating up
Lining and pegging
3
Sub-Total
4
1st Year
Weeding
Transportation of 2100 teak
seedlings and 2000 pegs to site
Planting Exercise
Planting of 1,600 teak seedlings
-Ditto2 man days @ N 800
for 5 days
4 man days @ 1000
for a day
N 8,000: 00
10 man days @ N
800 for 2 days
N 16,000: 00
N 4,000: 00
N 143,000: 00
Tending/Maintenance
Operations
Spot weeding
1st weeding
10 man days @ N
800 for 2 days
10 man days @ N
N 16,000: 00
N 32,000: 00
4
nd
2 weeding
3rd weeding
2nd Year
Weeding
1st weeding
3rd weeding
10 man days @ N 800 for
4 days
N 32,000: 00
1st weeding
10 man days @ N
800 for 4 days
10 man days @ N
800 for 4 days
10 man days @ N
800 for 4 days
N 32,000: 00
2 man days @ N 800
for 5 days
N 8,000: 00
2 man days @ N 800
for 5 days
N 8,000: 00
2 man days @ N 800
for 5 days
N 8,000: 00
3rd weeding
1st Year
clearing
2nd Year
clearing
3rd clearing
Fire Tracing and Clearing of
Rides
Fire tracing and clearing of rides
for 5 metre width around 1
hectare plantation
Fire tracing and clearing of rides
for 5 metre width around
1hectare plantation
Fire tracing and clearing of rides
for 5 metre width around 1
hectare plantation
Sub-Total
6. Land Rent
for 15 years
7. Pick-up van
for forest
operation
8 Monitoring
and
Supervision
Sub-Total
GRAND
TOTAL
COST
N 32,000: 00
N 32,000: 00
N 32,000: 00
N 328,000: 00
Other Expenditure
Rent / hectare /year @ N 10,000
One pick-up van @ N 350,000
and maintenance @ N 240,000
for 15 years
Rent for 15 years
N 150,000: 00
N 590,000: 00
N 15,000: 00
N 755,000: 00
N 1,274,000: 00
TOTAL
8. Incidentals
N 32,000: 00
N 32,000: 00
2nd weeding
5
N 32,000: 00
10 man days @ N
800 for 4 days
10 man days @ N
800 for 4 days
2nd weeding
3rd Year
Weeding
800 for 4 days
10 man days @ N
800 for 4 days
10 man days @ N
800 for 4 days
5% of the Total Cost
N 63,700: 00
N 1,337,700: 00
5
Official Exchange Rate of American Dollars (US$) to Nigerian Currency (Naira N )
1 US$ ≈ N 130
Total Cost for I hectare of Teak plantation for a-15 -year -rotation
= N 1,337,700: 00 ≈ US$ 10,290
3.0. Analytical Tool for Economic Analysis
3.1. Discount Cash Flow Analysis: The analysis is used to examine whether the techniques adopted for
teak plantation are economically efficient and beneficial to individuals interested in teak plantation
establishment. The analysis involves the following measures:
i.
Net Present Value (NPV): The NPV estimates the relative probability of a project and the
decision criterion is to accept a project with high NPV of teak plantation. NPV measures the
profit or surplus income from a project after the project has satisfied the rate of return on
capital desired by the investor.
Formula for NPV
n
NPV  
t 1
(B t - C t )
(1  i ) t
where,
Bt = Benefits in each project year t
Ct = Costs in each project year t
n = Number of years to the end of project (n ranges from 1 to 15)
i
= Discount rate (10%)
ii. Benefit Cost Ratio (B/C): The discounted gross benefit divided by the discounted gross cost. The B/C
measures the social equity and economic efficiency of resources utilization from the stand point of the society. A
decision of B/C is to accept projects with a ratio above one i.e. B/C>1
6
Formula for B/C
n
Bt

t
t  1 (1  i)
B/C  n
1
Ct

t
t  1 (1  i)
Bt, Ct, n, t, I as defined for NPV
Other measures are:
iii. Economic Rate of Return (ERR) : ERR is essentially a break-even discount rate in the sense that the
present value of benefit equals the present value of costs. It shows the decision maker what society can expect to
receive back in consumption benefits for a given investment of its scarce resources.
Formula for ERR
n
(B t - C t )
0
t
(1

i
)
t 1
ERR  
Bt, Ct, n, t, i as defined for NPV
To calculate ERR iteratively, the formula above is manually carried out as follows. It is however, advisable to
use SPSS software in order to save time.
ERR = (low rate of discount) + (difference between both rates of discount) x (Positive NPV)
Absolute difference between positive and negative NPVs
iv. Sensitivity Analysis (SA): The analysis is used for treating uncertainty. It is an inherent companion of
projects and ex ante assessments (FAO, 1992). Accurately or precisely identifying, valuing and comparing costs
and benefits is always a problem. A degree of uncertainty surrounds every estimated value. Information is nearly
always not complete and of limited quality. A major function of economic analysis is to test the sensitivity of
selected measures of project worth to changes in consumptions concerning inputs and outputs and the values
attached to them. There are no rules for choosing the parameters or combinations to be tested (FAO, 1992).
Having obtained NPV and ERR for the project, the alternative value assumptions that were less favourable in
terms of project outcome, i.e. higher costs assumptions and lower benefits assumptions are tested.
Discount Rate: The difference between the current price of a bill and its maturity value expressed as annualized
interest rate. It carries no fixed interest payments, only a principal value and redemption date (Lipsey and
Chrystal, 1999).
7
Discount Rate Formula
DR 
1
(1  i) t
Table 2: Discounted Cash Flow Analysis: I hectare Teak Plantation on a -15 -year –rotation
Year
Cost
(in Naira)
1
692,246.67
2
135,246.67
3
135,246.67
4
31,246.67
5
31,246.67
6
31,246.67
7
31,246.67
8
31,246.67
9
31,246.67
10
31,246.67
11
31,246.67
12
31,246.67
13
31,246.67
14
31,246.67
15
31,246.67
TOTAL 1,337,700: 05
Benefit
(in Naira)
8,000,000: 00
8,000,000: 00
D.F 10%
0.91
0.83
0.75
0.68
0.62
0.56
0.51
0.47
0.42
0.39
0.35
0.32
0.29
0.26
0.24
PVB
(in Naira)
1,920,000
1,920,000
PVC
(in Naira)
629,944.47
112,254.74
101,435.00
21,247.74
19,372.94
17,498.14
15,935.80
14,685.93
13,123.60
12,186.20
10,936.33
9,998.93
9,061.53
8,124.13
7,499.20
1,003,304.68
N.B. Each teak tree costs N5000 (i.e. at an age of 15 years)
Therefore, 1600 Teak trees cost 1600 x N 5000 = N 8,000,000: 00 if there are no natural disasters.
4.0. Results
4.1. GROSS MARGIN = TOTAL REVENUE – TOTAL COST
= N ( 8,000,000 – 1,337,700.05)
= N 6,662,299.95 ≈ US$51,248.46
4.2. Present Value Cost (PVC)
= N 1,920,00
4.3. Present Value Benefit (PVB) = N 1,003,304.68
4.4. Net Present Value (NPV) = PVB – PVC = N (1,920,000: 00 - 1,003,304.68)
NPV = N 916,695.32 ≈ US$ 7,051.50
8
4.5. Benefit Cost Ratio (B/C) i.e. PVB/PVC =
N 1,920,000: 00
N 1,003,304: 68
B/C = 1.9
5. Amortization Payment
A loan with a fixed interest rate is said to be amortized, if its principal and interest are paid in
equal periodic amounts. Amortization means loans repayment. Operative words here are equal
periodic amounts.
When a business man obtains a loan from a bank, a contract is signed that obligates the
borrower to repay the loan and all of the interest. When equal, periodic loan payments are made, the
borrower is amortizing the debt. The money the borrower receives now (the present value) is to be
repaid with interest as a series of payments. Thus, to determine the amount of each payment, the
formula is:
PA 
PV
a n/r
Where,
PV = Present Value of Loan
n = Total Number of compounding periods
r% = Annual Interest Rate
Number of compounding periods per year
An/r = Present Value of interest payment made over n periods at an r% interest rate per
period
Example:
An intending small holder of teak plantation borrows N1, 337,700 (US$ 10,290) from a bank or
government for the establishment of one hectare teak plantation. The loan is to be repaid in equal sixth monthly
instalments over 15 years. Find the amount of each payment if the annual interest rate is 10% compounded sixth
monthly.
Present Value Annuity formula
a n/r
(1  r) n - 1

r(1  r) n
9
PV = N1, 337,700 (Present Value of Loan)
n = 2 x 15 = 30 (Total number of compounding periods)
r% = 10% (annual interest rate)
2
(number of compounding periods per year)
= 5%
Sixth Monthly Payment is calculated as follows:
P=V
an/r
an/r = (1 + r)n-1
r(1 +r)n
= (1 + 0.05)30 -1
0.05(1 +0.05)30
= 15.37
Reciprocal of 15.37 = 0.065
For sixth monthly payment
P = N1,337,700 X 0.065 = N86,950. 50 = US$668.85
For 1 year Payment = N173,901 =US$1,337.7
For 15 years Payment = N2,608,515= US$20,065.5
Profit after harvesting
Revenue – Cost
i.e. Sales on 1600 teaks – loan payable every sixth month till 15 years project duration
=
N (8,000,000 – 2,608,515)
= N5, 391,485
= US$41,472.96
10
6. Discussion of Results
Efforts have been made to quantify some teak plantation’s real and potential contributions to intending
small holders in terms of revenue generation per hectare of land from two perspectives namely: (i ) the owner of
capital to be invested on one hectare of teak plantation establishment and (ii) the borrower of capital either from
the government or the bank for the same one hectare of teak plantation establishment.
The result shows that the net return on the capital for the owner of N1, 337, 7700 (US$10,290) after
15th year will be N 6,662,299.95 (US$51,248.46). When the costs and benefits are discounted from year 1 to
year 15, the NPV will be N 916,695.32 (US$7,051.50) with a corresponding B/C 1.9. Based on the criterion of
the economic measures, the NPV is positive while the corresponding B/C is greater than 1. This shows that the
investment on small scale teak establishment for small holders is profitable, economically efficient and socially
acceptable. From the perspective of the borrower of N1,337,7700 (US$10,290 ) from the Government on
Amortization payment, the net return to him after harvesting will be N5,391,485 (US$41,472.96) while the
principal and interest payable to the government by the borrower in the 15th year
will be N 2,608,515
(US$20,065.50).
7. Conclusion
The relationship between man and forests has always changed with socio-economic development and
will certainly continue to change (Blauberg, 1997). The reason is that Man/Land ratio will continue to be high
and more wood products will be demanded in the future. Therefore, in a contemporary world, involvement of
small holders in investment of fast growing species like teak will be a major way of achieving sustainable forest
development, income generation and abundant supply of timber, transmission poles, cross bars, etc. when
demanded from time to time.
This paper has shown that the investment in teak plantation makes a valuable economic, social and
environmental contribution to the small holders and the society. This valuation has possibly been masked in the
past when demand for both indigenous and exotic tree species was not high and the population was very small as
compared with the geometric population nowadays. The climate in Nigeria is favourable for teak plantation
establishment. Therefore, if a group of ten small holders could be leased 10 hectares of land by the government
for 15 years; this will translate to 16,000 teak trees provided natural disaster does not occur and beating-up is
carried out in the first, second and third years of teak establishment. If a lot of people (group of small holders) do
the same, then the development goals in the forestry sector will be realized in this millennium.
Development strategies for the enhancement of investment in small-holder of timber production are
recommended as follows:

The local, state and federal governments should review the forest policies to be pursued in developing
countries in the future for sustainable timber production. These would include encouragement and
persuasion of small holders of timber production to join the train of sustainable forest
development; foster private investment in tree and forest actions to restore and maintain healthy
11
ecosystems; and to offer technical and financial assistance or incentives to help restore and
maintain expanse of land under small holder of timber production.

There should be a forum for negotiation aiming at gaining a social agreement concerning land
use both in the free areas and forest reserves by small holders of timber production. This will at
least solve the conflict of land hunger/landlessness between government and small holders of
land for timber production.

A lot of latent graduates that are productive abound in the society without jobs. Government
should use this small holding to assist them to be job providers rather than job seekers via
provision of land, motivation with incentives like loans, grants, seedlings, training and retraining
in small-holding timber production.

Government should also promulgate a law that will protect the small holders of timber
production to market their timber without too much tax.
8. References
Agbeja, B.O. (2002): Consideration for Sound Forest Policy Investment in Osun and Oyo States, Nigeria.
Nigerian Journal of Ecology (2002) 4 (2): 94-100.
Barbour, I.G. (1980): Technology, Environment and Human Value, Praeger, New York. 331pp.
Blauberg, H.P. 1997. Challenges for forestry in a new economic, social and environmental context. In:
Proceedings of the XI World Forestry Congress, Vol.7, pp.181, Antalya, Turkey
Brown, T.C. (1984): The Concept of Value in Resource Allocation Land Economics, 60(3): 231
Chapman, H.H. and Meyer, W.H. (1947): Forest valuation, New York, McGraw-Hill.
FAO (1992): Economic Assessment of Forestry Project Impacts FAO Paper 106, Rome 1992. Pp. 101110.
FAO (1995): Valuing Forests: Context, Issues and Guidelines. FAO Paper 127, Rome 1995. pp. 38-39.
FORMECU (1993): Review of the Nigeria Wood-Based Sector.pp1-10.
Hiley, W.E. (1956): Economics of Plantations. London, Faber and Faber.
IIED (1994): Economics of evaluation of tropical forest land use options: a review of methodology and
applications. London, IIED (draft).
Lipsey,R. G.and Chrystal, K.A. 1999. Principles of Economics. Ninth edition Oxford University
Press. p. 614
Michael, S.G. (1995): Economic Valuation of the multiple use of forests: the case study of Bwindi
Impenetrable Natural Park (BINP), Uganda, University of Edinburgh , UK. (M.Sc. Dissertation). Pp.4 -11
Winpenny, J.T. (1991): Values for the environment a guide to economic appraisal, London, HMSO.
Worell, A.C. 1970. Principles of Forest Policy. New York: McGraw-Hill. 243pp.
12
13