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Econ

Bunyan Lumber owns a 5,000 acre forest in Oregon that was planted 20 years ago. The company is evaluating when to harvest the timber to maximize profits. Options to harvest are in 20, 25, 30, or 35 years. Harvesting sooner yields a smaller volume but higher quality timber. Later harvesting increases volume but some timber quality declines. The company must consider costs of harvesting, replanting, and contributions to a conservation fund required for permits. The finance officer needs to recommend the optimal harvest timing.

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99 views1 page

Econ

Bunyan Lumber owns a 5,000 acre forest in Oregon that was planted 20 years ago. The company is evaluating when to harvest the timber to maximize profits. Options to harvest are in 20, 25, 30, or 35 years. Harvesting sooner yields a smaller volume but higher quality timber. Later harvesting increases volume but some timber quality declines. The company must consider costs of harvesting, replanting, and contributions to a conservation fund required for permits. The finance officer needs to recommend the optimal harvest timing.

Uploaded by

leachy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Bunyan Lumber, LLC

Bunyan Lumber, LLC, harvests timber and delivers logs to timber mills for sale. The company was founded 70 years ago
by Pete Bunyan. The current CEO is Paula Bunyan, the granddaughter of the founder. The company is currently
evaluating a 5,000-acre forest it owns in Oregon. Paula has asked Steve Boles, the company’s finance officer, to evaluate
the project. Paula's concern is when the company should harvest the timber.

Lumber is sold by the company for its "pond value." Pond value is the amount a mill will pay for a log delivered to the mill
location. The price paid for logs delivered to a mill is quoted in dollars per thousands of board feet (MBF), and the price
depends on the grade of the logs. The forest Bunyan Lumber is evaluating was planted by the company 20 years ago and
is made up entirely of Douglas fir trees. The table here shows the current price per MBF for the three grades of timber the
company feels will come from the stand:
:

Timber Grade Price per MBF


1P $1,050
2P 925
3P 770

Steve believes that the pond value of lumber will increase at the inflation rate. The company is planning to thin the forest
today, and it expects to realize a positive cash flow of $1,000 per acre from thinning. The thinning is done to increase the
growth rate of the remaining trees, and it is always done 20 years following a planting.
The major decision the company faces is when to log the forest. When the company logs the forest, it will immediately
replant saplings, which will allow for a future harvest. The longer the forest is allowed to grow, the larger the harvest
becomes per acre. Additionally, an older forest has a higher grade of timber. Steve has compiled the following table with
the expected harvest per acre in thousands of board feel, along with the breakdown of the timber grades:

Years from Today to Harvest per Acre Timber Grade


begin Harvest (MBF) 1P 2P 3P
20 6 10% 40% 50%
25 7.6 12 42 46
30 9 15 42 43
35 10 16 43 41

The company expects to lose 5 percent of the timber it cuts due to defects and breakage.

The forest will be clear-cut when the company harvests the timber. This method of harvesting allows for faster growth of
replanted trees. All of the harvesting, processing, replanting, and transportation are to be handled by subcontractors hired
by Bunyan Lumber. The cost of the logging is expected to be $140 per MBF. A road system has to be constructed and is
expected to cost $50 per MBF on average. Sales preparation and administrative costs, excluding office overhead costs,
are expected to be $18 per MBF.
As soon as the harvesting is complete, the company will reforest the land. Reforesting costs include the following:

Costs per Acre


Excavator piling $150
Broadcast burning 300
Site preparation 145
Planting costs 225

All costs are expected to increase at the inflation rate.


Assume all cash flows occur at the year of harvest. For example, if the company begins harvesting the timber 20 years
from today, the cash flow from the harvest will be received 20 years from today. When the company logs the land, it will
immediately replant the land with new saplings. The harvest period chosen will be repeated for the foreseeable future.
The company’s nominal required return is 10 percent, and the inflation rate is expected to be 3.7 percent per year.
Bunyan Lumber has a 35 percent tax rate.
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 $100,000. The company has agreed that the required contribution will grow by 3.2
percent per year. When should the company harvest the forest?

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