Deriving the discount rate for seedling nurseries and other livelihood projects

A critical parameter in the financial appraisal of forestry investment projects is the discount rate or required rate of return by the investor – usually taken as the weighted average cost of capital – used to convert incremental net cash flows to their present values. For forestry projects by smallholder and indigenous communities, relatively high discount rates are invariably adopted in investment project assessment (IPA). Long payback period and uncertain or community tenure can make formal sources of lending inaccessible. An assessment of availability of finance and of previous investment studies for small-scale forestry-related projects in the Philippines suggests an appropriate discount rate of about 20% per annum in current price terms or about 15% for constant price analysis (net of inflation)