Economic Feasibility of the Small-scale Foreign Forest Resource Investment in Lao PDR

Abstract

To protect and preserve forest resources, LAO PDR government has made efforts to invite foreign capitals in various ways, and these efforts are in accordance with Korea’s foreign forestation policies in terms of extending supply sources of the domestic consumption of wood products. Under these circumstances, the attempts to measure economic feasibility of forestation business is very important, prior to the projection of the actual investment plans. The basic purpose of this study is to evaluate economic feasibility of the small-scale forestation business in LAO PDR. Like other studies regarding economic feasibility, this study employs Benefit-Cost ratio(B/C ratio), Internal Rate of Return(IRR) and Net Present Value(NPV) as the representative indices. Futhermore, re-evaluation of the feasibility in the middle of ongoing projects provide flexible decision making information from the viewpoint of enterprises and relevant policy makers. The case study were conducted with M company, which has relatively smallscale forestation business in LAO PDA since 2002, planting Agarwood, Teak, Rubber, etc. According the analysis from the base scenario, the IRR is 19.62, which is high enough compared with the current business opportunity cost in Korea, implying that the business is economically feasible. At the same time, assuming 8% of discounting rate, B/C ratio is 1.54, which implies 0.54 monetary unit of net revenue as a result of investing 1 monetary unit. Sensitivity analysis was conducted to observe how the indices change with the possible changes of the amount of benefits or costs. With 20% increase in benefits, IRR rises to 24.69, whereas IRR falls to 13.53% with 20% decrease. With 10% and 20% increases in major variable costs, IRR falls to 18.86 and 18.13, respectively. The overall result implies that the business is economically feasible when assuming 8% of the domestic discounting rate, with the consideration of various range of unit prices from the sensitivity analysis.