Practices used in estimating the cost of capital and investment appraisal in the Chilean forestry sector

The proper determination of cost of capital is crucial in the maximization of forest enterprises value as it depends on the capital budgeting decisions made by the managers. It is unknown whether the firm size has an effect on the techniques used to determine the cost of capital in the Chilean forestry sector. The main objective of this research was to determine the practices used by decision makers from the forestry sector to estimate the cost of capital and, at the same time, how their investments how evaluated. In order to carry out this study, a survey was conducted by using the SurveyMonkey online tool. The final survey consisted of 20 questions. A total of 189 people from 49 companies were registered. The study allows concluding that the net present value (NPV) is the main investment appraisal used by decision makers from the Chilean forestry sector. On the other hand, the estimation of the cost of capital is mostly performed by means of the Cost of Debt method. In addition, it was verified that there is a lack of knowledge on the budging techniques used worldwide.