CHAPTER 7
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
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:
Road cost = (Cost MBF)(MBF per acre)(acres)
Sale preparation and administration = (Cost MBF)(MBF acre)(acres)
Excavator piling, broadcast burning, site preparation, and planting costs are the cost of each per acre
times the number of acres. These costs are the same no matter what the harvest schedule since they
are based on acres, not MBF.
40-year harvest schedule:
Revenue
$44,139,565
Tractor cost
10,947,500
Road
3,775,000
Sale preparation & admin
1,359,000
Excavator piling
775,000
Broadcast burning
1,525,000
Site preparation
750,000
Planting costs
1,150,000
EBIT
$23,858,065
Taxes
5,010,194
Net income (OCF)
We also need the 40-year interest rate for the conservation fund, which will be:
40-year conservation interest rate = [(1 + .0659)40] – 1
40-year conservation interest rate = 1,183.87%
Since we have the cash flows from each thinning, and the next thinning will occur in 40 years, we can
find the present value of future thinnings on this schedule, which will be:
And the value today is:
PVConservation = –$428,365.28/(1 + .0659)20
45-year harvest schedule:
Revenue
$51,209,940
Tractor cost
12,615,000
Road
4,350,000
Sale preparation & admin
1,566,000
Excavator piling
Broadcast burning
Site preparation
Planting costs
1,150,000
EBIT
$28,478,940
Taxes
5,980,577
Net income (OCF)
$22,498,363
The PV of the first harvest in 25 years is:
PVFirst = $22,498,363/(1 + .0608)25
PVThinning = $6,000,000/13.2111
PVThinning = $454,164.56
The operating cash flow from each harvest on the 45-year schedule is $22,498,363, so the present
value of the cash flows from the harvests are:
PVHarvest = [($22,498,363/13.21111)]/(1 + .0608)25
NPV = $5,908,997.10
50-year harvest schedule:
Revenue
$53,659,515
Tractor cost
13,195,000
Road
4,550,000
Sale preparation & admin
1,638,000
Excavator piling
Broadcast burning
Site preparation
Planting costs
1,150,000
EBIT
$30,076,515
Taxes
6,316,068
Net income (OCF)
$23,760,447
PVFirst = $4,049,830
Thinning will also occur on a 50-year schedule, with the next thinning 50 years from today. The
effective 50-year interest rate for the project is:
50-year project interest rate = [(1 + .0608)50] – 1
50-year project interest rate = 1,808.52%
PVHarvest = $223,930.74
Now we can find the present value of the conservation fund deposits. The present value of these
deposits at Year 30 is:
PVConservation = –$395,000 – $395,000/23.3024
PVConservation = –$411,951.03
55-year harvest schedule:
Revenue
$55,808,629
Excavator piling
775,000
Broadcast burning
1,525,000
Site preparation
750,000
Planting costs
1,150,000
EBIT
$31,480,129
Taxes
6,610,827
Net income (OCF)
We also need the 55-year interest rate for the conservation fund, which will be:
55-year conservation interest rate = [(1 + .0659)55] – 1
55-year conservation interest rate = 3,243.60%
Since we have the cash flows from each thinning, and the next thinning will occur in 55 years, we can
find the present value of future thinnings on this schedule, which will be:
Tractor cost
Road
4,725,000
Sale preparation & admin
1,701,000
And the value today is:
PVConservation = –$407,177.83/(1 + .0659)35
PVConservation = –$43,634.45
So, the NPV of a 55-year harvest schedule is:
NPV = $3,156,284 + 243,595.16 + 128,142.59 – 43,634.45