Arboriculture & Urban Forestry 33(1): January 2007 7 Discounting The future stream of benefits (income) and expenses was converted into present value through capitalization or dis- counting (Council of Tree & Landscape Appraisers 2000). The discount rate incorporates the time value of money and inflation. The former refers to the fact that a dollar received in the future is worth less than one received in the present, because the present dollar can earn interest. Inflation is the anticipated escalation in prices over time, which is assumed to be the same for benefits and costs in this analysis. Select- ing a discount rate is problematic because the cost of capital is different for a municipality than for a resident or business. Generally, higher discount rates are associated with lower net present values (NPV) of investments in tree planting because most costs are incurred during the first years when trees are planted, whereas most benefits occur later as the trees mature and are discounted heavily. To assess how these findings change in response to different discount rates, results are presented using rates of 0%, 4%, 7%, and 10%. NPV esti- mates (present value of benefits minus present value of costs) can be interpreted as yield on the investment in excess of the cost of capital. The benefit–cost ratio is the ratio of the pres- ent value of benefits and costs. RESULTS—MULTITREE EXAMPLE Comparing Cost- and Benefit-Based Tree Values The first question addressed was “How do cost-based esti- mates of tree value compare with benefit-based estimates?” The cost-based appraised value of the five trees was $8,756 with the average amount $1,751 per tree (Table 2). The ben- efit-based NPVs for the five trees were negative at all dis- count rates, ranging from $−6,481 (0%) to $−1,129 (10%) (Table 4, retain scenario). Contrary to normal, NPVs in- creased (were less negative) with higher discount rates, pri- marily because sizable future curb and sidewalk replacement expenditures at years 20 and 40 were heavily discounted rela- tive to future benefits. Without discounting, total annual benefits ranged from $50 to $90 per tree with the majority attributed to aesthetics/ Table 4. Present values (PVs) for two scenarios: retain trees or remove and replant five pistache trees in nearby shrub bed, years 16 to 40 PV Benefits Discount rate (%) Retain 0 4 7 10 PV Costs Remove/ replace Retain Net PV Remove/ replace Retain Remove/ replace 8,629 8,625 15,109 9,194 −6,481 −569 5,696 4,844 4,407 3,310 3,543 2,355 8,737 8,096 −3,041 −3,252 6,221 7,559 −1,814 −4,249 4,672 7,159 −1,129 −4,803 Figure 5. Average cumulative benefits and costs per streetside pistache tree (0% discount rate), years 16 to 40. ©2007 International Society of Arboriculture others and energy savings. Cumulative annual benefits in- creased steadily to a peak $1,720 per tree at 40 years. Costs peaked at $−3,022 per tree at 40 years (Figure 5). Total annual costs were typically $4 to $6 per tree but jumped to $170, $190, and $1,200 per year when tree care and infra- structure repair activities were projected to occur. Without discounting, total benefits for all five trees over 25 years (years 16 to 40) were $8,629 ($1,726/tree), surprisingly simi- lar to the appraised value. However, expenditures totaled $15,109 ($3,022/tree), resulting in a negative net value of $−6,481 ($−1,296/tree) (Table 4). Even heavy discounting of future costs did not produce a positive NPV. In this example, the cost-based estimate of value was ap- proximately two to five times greater than the benefit-based estimate. Substantial future sidewalk expenditures included in the benefit-based approach magnified the difference be- tween results. From the sidewalk manager’s perspective, the cost-based approach may not provide the most reasonable indication of value. Replacement cost does not incorporate future costs, which were projected to be substantial. There- fore, in situations such as this, the benefit-based approach can be a good tool for testing and adjusting the reasonableness of a cost-based estimate of value. Cost-Effectiveness of Removal and Replacement versus Tree Retention The second question addressed in this article was, “Using the benefit-based approach, can we determine if it is cost- effective to remove and replace these trees in a more suitable site nearby?” Removing and replacing the pistache trees in the nearby shrub bed, where there is ample room to grow, incurs short-term costs but avoids sidewalk and curb repair costs during the next 25 years. Benefits from the smaller transplants will be less than from the existing pistache (23 cm
January 2007
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