This chapter presents a case study of the structure and application of financial models for the evaluation of investment projects in forestry. Forestry projects provide a good example of capital budgeting in that forestry is a very long-term investment, i.e. one with substantial initial outlays but with main cash inflows typically more than thirty years later. The case study illustrates principles which would apply equally well to other forms of long-term investment, e.g. in mining, energy, tourism or manufacturing.

While one-off models can be developed to evaluate individual forestry projects, the cash outflows and inflows of all forestry projects have much in common, giving rise to the opportunity to develop a generic model which can be used to evaluate a variety of separate investment projects by a variety of users. Generic models are often large and complex, and involve considerable development effort. A generic model has important advantages over a one-off model for investment areas where projects with similar features repeatedly arise. Development costs can be spread over a number of applications or users. Greater expertise can be brought to bear in the design, development and testing of the model, and it is often possible to include a greater range of features or capabilities in the model.

When designing and developing a generic model, a number of important questions need to be addressed: What is the model to be used for?