Bunyan Lumber Llc

Bunyan Lumber, LLC

Bunyan Lumber, LLC has a 7,500-acre forest of Douglas Fir trees that they wish to harvest at the optimal time for profit maximization. The company plans to thin the trees today, which will result in a positive cash flow of $9 million. Thinning the trees allow for optimal growth of the trees until they are ready to be harvested. Our options of when to harvest the trees are 20, 25, 30, and 35 years from today. They are currently 20 years old today, so they will be between 40 and 55 years of age when we plan to harvest. The longer we wait to harvest the trees, the more product we can get from the growth of the trees, and the expected grade of the logs improves over time.

Benefits to waiting to harvest the forest are: increased amount of time to grow, increased amount of time to improve the expected timber grade of the trees, and the value of the lumber is expected to increase with the rate of inflation which is estimated to be 3.7%. Disadvantages to waiting to harvest the forest include: costs increase at the rate of inflation, the clear-cut harvest contribution increases 3.2% annually, and most importantly the time value of money.

For the following, please refer to the attached spreadsheet, Bunyan Lumber, LLC.xls.

• Figures 1 and 2 include information provided from Bunyan Lumber, LLC

• Figure 3 shows the amount of MBF per acre per grade. This can be calculated using the information provided in Figure 2. For example, the amount of 1P lumber we can expect 30 years from today is 9.4MBF per acre x 17%. Cell B13 x Cell C 13 provides this answer.

• Figure 4 provides the value of the expected lumber in each year. This is found using the answers from Figure 3 multiplied by information provided from the text shown in figure 1.

• Figure 5 adjusts our expected value of the proceeds for the expected 5% loss of product due to breakage and defect.

• Figure 6 adjusts our expected revenue for inflation. The inflation is expected to be...