Week 2 Bus 650
Bunyan Lumber LLC
Clear-cutting is a controversial method of forest management. To obtain the necessary permits, Bunyan Lumber has agreed to contribute to a conservation fund every time it harvests the lumber. If the company harvested the forest today, the required contribution would be $300,000. The company has agreed that the required contribution will grow by 3.2 percent per year. When should the company harvest the forest?
The options that are available to harvest are years 40, 45, 50, and 55 year harvest cycles. This is because the forest was planted 20 years ago. Due to the inflation rate, and cash flow we will be looking at the real and nominal cash flow. Nominal cash flow and real cash refer to the same sources of cash to a business. However, different formulas are used for both. Real cash flow is basic measurement that takes basic measurement of cash flow into consideration, as well as present value. Nominal cash flow does not use inflation to determine cash flow. Nominal cash flow is more precise in forecasting future projects.
Real Cash flow is:
(1 + R) = (1 + r)(1 + h)
1.10= (1+r) (1.037) r=.0608 r=6.08%
Conservation funds will grow at a slower rate than the inflation. The real return for the conservation fund can be determined by:
(1 + R) = (1 + r)(1 + h)
1.10= (1 + r)(1.032) r=.0659 r=6.59%
Cash flow from the thinning process also needs to be determined in order to have the accurate harvest schedule. The cash flow from the thinning process (CFT) is figured:
CFT= Acres thinned ¡Á Cash flow per acre
CFT= 7,500(1200)
CFT=$9,000,000
The real cost of the conservation fund can be viewed above, however the after-tax cost needs to be figured.
After-tax conservation= (1 C .35)(250,000)
After-tax conservation=$162,500
Revenue costs are
Revenue=(% 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
Clear-cutting is a controversial method of forest management. To obtain the necessary permits, Bunyan Lumber has agreed to contribute to a conservation fund every time it harvests the lumber. If the company harvested the forest today, the required contribution would be $300,000. The company has agreed that the required contribution will grow by 3.2 percent per year. When should the company harvest the forest?
The options that are available to harvest are years 40, 45, 50, and 55 year harvest cycles. This is because the forest was planted 20 years ago. Due to the inflation rate, and cash flow we will be looking at the real and nominal cash flow. Nominal cash flow and real cash refer to the same sources of cash to a business. However, different formulas are used for both. Real cash flow is basic measurement that takes basic measurement of cash flow into consideration, as well as present value. Nominal cash flow does not use inflation to determine cash flow. Nominal cash flow is more precise in forecasting future projects.
Real Cash flow is:
(1 + R) = (1 + r)(1 + h)
1.10= (1+r) (1.037) r=.0608 r=6.08%
Conservation funds will grow at a slower rate than the inflation. The real return for the conservation fund can be determined by:
(1 + R) = (1 + r)(1 + h)
1.10= (1 + r)(1.032) r=.0659 r=6.59%
Cash flow from the thinning process also needs to be determined in order to have the accurate harvest schedule. The cash flow from the thinning process (CFT) is figured:
CFT= Acres thinned ¡Á Cash flow per acre
CFT= 7,500(1200)
CFT=$9,000,000
The real cost of the conservation fund can be viewed above, however the after-tax cost needs to be figured.
After-tax conservation= (1 C .35)(250,000)
After-tax conservation=$162,500
Revenue costs are
Revenue=(% 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