FNR 91
forestry & natural resources
WOODLAND MANAGEMENT 
Financial Maturity: A Guide To When Trees Should Be Harvested
by W. L. Mills, Jr. and John C. Callahan, Department of Forestry and Natural Resources
Financial maturity is a concept which provides for the maximization of monetary returns from an investment in an appreciating asset (one increasing in value over time). The financial maturity calculation requires that the investment opportunity at some point in its life meet the owner’s profitability objective. Therefore, it is necessary that the investment be an acceptable one to the investor based on an analysis of its net present worth or internal rate of return.1
Financial maturity, then, is the point in the life of an appreciating asset when the owner’s cost of keeping an asset exceeds the expected monetary gain. Timber, some wines, bonded distilled liquors, and livestock can be categorized as appreciating assets. All have characteristics which make it difficult to ascertain the age at which financial maturity is reached. In the case of timber, the basic reasons for this difficulty are the inherent nature of the wood production process (a tree is both the production facility and the product) and the changes in quality which occur as trees grow in size.
Since a tree’s annual growth cannot be harvested without also destroying the production process itself, financial maturity for trees is approximated when the tree’s rate of value increase (value growth percent) is just equal to the owner’s implicit cost associated with the capital investment in the tree. This cost is determined by the rate of return which the owner expects from other investments of similar risk and duration.
1See Chapman, H.H. & W.H. Meyers, 1947. Forest Valuation. New York. McGraw-Hill Book Company, Inc. of Johnston, R.W., 1970. Capital Budgeting. Belmont, California. Wadsworth Publishing Company, Inc. for a discussion of net present worth and internal rate of return.
In other words, financial maturity is that point in the life of the tree beyond which the expected value increase no longer equals or exceeds the net return which would be obtained if the tree were sold and the cash value were invested elsewhere. The owner’s “expected” rate of return is referred to as his “alternative rate of return” which is discussed in greater detail later. The net effect of cutting financially mature timber is to maximize the net return to the forest enterprise.2 If the tree is not cut when the point of financial maturity is reached, the investment will not be earning a rate of return greater than or equal to the return expected from the alternative investment. Thus, the cutting of the tree and the reinvestment of the capital funds at the alternative rate of return will provide a greater return than maintaining the investment in the tree. Throughout this discussion, it is assumed that the investor wants to maximize his return on investment and that an alternative investment is always available for reinvestment, e.g., a savings account.
In contrast, the biological maturity of a tree or a stand of trees occurs when the tree or stand achieves maximum merchantable volume. Financial maturity differs from biological maturity by imposing economic and business management constraints on the production process. In determining financial maturity, benefits are weighed against costs. The benefits are
2Proof of this statement and derivation of formulas used in this publication can be obtained by writing Dr. J. C. Callahan, Department of Forestry and Natural Resources, Purdue University, West Lafayette, IN 47907.
PURDUE UNIVERSITY • COOPERATIVE EXTENSION SERVICE • WEST LAFAYETTE, INDIANA 47907