Forest Harvesting with Multi - Factor Uncertainty 1 _ 15 _ 11

We provide a multi-factor real option model for a single harvest and then for perpetual forest harvesting, which extends the Faustmann (1849) approach to infinite rotations with multi-factor uncertainty. We examine separately forest growth and timber prices (and eventually credits/penalties for CO2 uptake/release upon harvest), so the forester can focus on critical exogenous and partially endogenous factors. While the single harvest option and its value at optimal harvest time are expressible as products of the timber price and forest size, the replanting option is not, so the principle of similarity sometimes used to reduce the dimensions of two factor models does not apply. We provide a unique quasianalytical solution for multi-factor uncertainty in forestry to determine the multiple rotation value and optimal harvest size.