Time Fo a Change

BUNYAN LUMBER, LLC

The company is faced with the option of when to harvest the lumber. Whatever harvest cycle the company chooses, it will follow that cycle in perpetuity. Since the forest was planted 20 years ago, the options available in the case are 40-, 45-, 50, and 55-year harvest cycles. No matter what harvest cycle the company chooses, it will always thin the timber 20 years after harvests and replants. The cash flows will grow at the inflation rate, so we can use the real or nominal cash flows. In this case, it is simpler to use real cash flows, although nominal cash flows would yield the same result. So, the real required return on the project is:

(1 + R) = (1 + r)(1 + h)

1.10 = (1 + r)(1.037)

r = .0608 or 6.08%

The conservation funds are expected to grow at a slower rate than inflation, so the real return for the conservation fund will be:

(1 + R) = (1 + r)(1 + h)

1.10 = (1 + r)(1.032)

r = .0659 or 6.59%

The company will thin the forest today regardless of the harvest schedule, so this first thinning is not an incremental cash flow, but future thinning is part of the analysis since the thinning schedule is determined by the harvest schedule. The cash flow from the thinning process is:

Cash flow from thinning = Acres thinned ¡Á Cash flow per acre

Cash flow from thinning = 7,500($1,200)

Cash flow from thinning = $9,000,000

The real cost of the conservation fund is constant, but the expense will be tax deductible, so the aftertax cost of the conservation fund will be:

Aftertax conservation fund cost = (1 ¨C .35)($250,000)

Aftertax conservation fund cost = $162,500

For each analysis, the revenue and costs are:

Revenue = [¡Æ(% of grade)(harvest per acre)(value of board grade)](acres harvested)(1 ¨C defect rate)

Tractor cost = (Cost MBF)(MBF per acre)(acres)

Road cost = (Cost MBF)(MBF per acre)(acres)

Sale preparation and administration = (Cost MBF)(MBF acre)(acres)

Excavator piling, broadcast burning, site...