BUNYAN LUMBER, LLC

The company is faced with the choice of when to harvest timber. The harvest period chosen will be
repeated for the foreseable. Since forests were planted 20 years ago, the choices available in this case
are, 40, 45, 50 and 55 years. Cash flow will grow at the inflation rate, so we can use real nominal cash
flows. In this case, it is easier to use real cash flow, even though the nominal cash flow will produce the
same results. So, the actual return needed for this project is

 (1+R)=(1+r)(1+h)

(1+10%)= (1+r)(1+3,7%)

(1,10)=(1+r)(1,037)

r= 0,608 / 6,08%

Conservation funds are expected to grow at a rate lower than inflation, so the actual conservation
refund will be:

 (1+R)=(1+r)(1+h)

(1,10%)=(1+r)(1,032)

r= 0,659 / 6,59%

The cash flow from the thinning process is

 Cash Flow From Thinning = Acres Thinned X Cash Flow Per Acre

Cash Flow From Thinning = 5000 X 1000

Cash Flow From Thinning = 5000000

The true cost of conserving funds is fixed, but the costs will be reduced by taxes, so the aftertax cost of
the conservation fund becomes:

 Aftertax conservation fund cost = (1-0,35)(250.000)

Aftertax conservation fund cost = 162.500

For each analysis, revenue and cost are

 Revenue = [Amount (% per Timber Grade)x(Harvest per Acre)x(Price per MBF per Timber
Grade)] x (Total acreage) x (1-Defect rate)
 Tractor cost = Cost per MBF x Harvest (MBF) per Acre x Total Acreage
 Road cost = Cost per MBF x Harvest (MBF) per Acre x Total Acreage
 Sale preparation and administration = Cost per MBF x Harvest (MBF) per Acre x Total Acreage
 Excavator piling, broadcast burning, site preparation and planting costs are the costs per hectare
each time the number of hectares. This fee does not matter what the harvest schedule is because it
is based on hectares rather than MBF. Now we can calculate the funds. Flow for each harvest
schedule, one important note is that there is no depreciation given in this case. Because the harvest
period tends to be short, the assumption is that there is no shrinkage caused by harvest. This implies
that operating cash flows are equal to net income. Now we can calculate the NPV of the first
harvest, thinning NPV, the sum of all of the harvest in the future, reduced by the present value of
the cost of conservation funds.

Case 1: 40 years harvest schedule

Revenue $ 40.359.135
Tractor cost $ 9.870.000
Road $ 3.525.000
Sale preparation & admin $ 1.269.000
Excavator piling $ 750.000
Broadcast burning $ 1.500.000
Site preparation $ 725.000
Planting costs $ 1.125.000
EBIT $ 21.595.135
Taxes $ 7.558.297
Net income (OCF) $ 14.036.838

PV of first harvest

 PV = Net income (OCF) /(1+r)^n

PV = 14.036.838 / ( 1+ 0,608)^20

PV = 4.315.098

Next thinning will occur in 40 years, and will reoccur at this same interval. The effective real interest rate
for this period is

 40-year project effective real interest rate = [(1+ 0,608)^40] -1

40-year project effective real interest rate = 958,2 %

The effective real interest rate for the conservation fund for this period is

 40-year project effective real interest rate for the conservation fund = [(1+ 0,0659)^40] -1

40-year project effective real interest rate for the conservation fund = 1183,9%

When it has the cash flow of each thinning, and thinning will occur in the next 40 years, we can look for
the PV of future thinning on this schedule, which will be:
  PV thinning = 5000000/9,582

PV thinning = 521.825,8

The Operation Cash Flow of each harvest on the 40-year period are 14,036,838 so PV of future harvests
is :

 PV of future harvest = [(14,036,838 /9,582)]/ (1+0,0608)^20

PV of future harvest = 450.345,94

Now we can look for PV from conservation deposit fees. Value of conservation at harvest is:

 Value of conservation at harvest = -162.500-162.500/11,839

Value of conservation at harvest = -176.226,22

And the present value is

 PV of conservation fund = -176.226,22/(1,0659)^20

PV of conservation fund = -49.182,52

Thus, the 40-year harvest schedule’s NPV is

 NPV = 4.315.098 + 521.825,8 + 450.345,94 – 49.182,52

NPV = 5.238.087,63

Case 2: 45 years harvest schedule

Revenue $ 47.051.600
Tractor cost $ 11.480.000
Road $ 4.100.000
Sale preparation & admin $ 1.476.000
Excavator piling $ 750.000
Broadcast burning $ 1.500.000
Site preparation $ 725.000
Planting costs $ 1.125.000
EBIT $ 25.895.600
Taxes $ 9.063.460
Net income (OCF) $ 16.832.140

PV of first harvest
  PV = Net income (OCF) /(1+r)^n

PV = 16.832.140 / ( 1+ 0,608)^25

PV = 3.852.930

Next thinning will occur in 45 years, and will reoccur at this same interval. The effective real interest rate
for this period is

 45-year project effective real interest rate = [(1+ 0,608)^45] -1

45-year project effective real interest rate = 1321,1%

The effective real interest rate for the conservation fund for this period is

 45-year project effective real interest rate for the conservation fund = [(1+ 0,0659)^45] -1

45-year project effective real interest rate for the conservation fund = 1666,4%

When it has the cash flow of each thinning, and thinning will occur in the next 45 years, we can look for
the PV of future thinning on this schedule, which will be:

 PV thinning = 5000000/13,211

PV thinning = 378.470,46

The Operation Cash Flow of each harvest on the 45-year period are 16.832.140 so PV of future harvests
is :

 PV of future harvest = [(16.832.140 /13,211)]/ (1+0,0608)^25

PV of future harvest = 291.644,04

Now we can look for PV from conservation deposit fees. Value of conservation at harvest is:

 Value of conservation at harvest = -162.500-162.500/16,664

Value of conservation at harvest = -172.251,67

And the present value is

 PV of conservation fund = -172.251,67/(1,0659)^25

PV of conservation fund = -34.941,27

Thus, the 45-year harvest schedule’s NPV is

 NPV = 3.852.930 + 378.470,46 + 291.644,04 - 34.941,27

NPV = 4.488.103,20
 Case 3: 50 years harvest schedule

Revenue $ 49.699.440
Tractor cost $ 12.110.000
Road $ 4.325.000
Sale preparation & admin $ 1.557.000
Excavator piling $ 750.000
Broadcast burning $ 1.500.000
Site preparation $ 725.000
Planting costs $ 1.125.000
EBIT $ 27.607.440
Taxes $ 9.662.604
Net income (OCF) $ 17.944.836

PV of first harvest

 PV = Net income (OCF) /(1+r)^n

PV = 17.944.836 / ( 1+ 0,608)^30

PV = 3.058.593

Next thinning will occur in 50 years, and will reoccur at this same interval. The effective real interest rate
for this period is

 50-year project effective real interest rate = [(1+ 0,608)^50] -1

50-year project effective real interest rate = 1808,5%

The effective real interest rate for the conservation fund for this period is

 50-year project effective real interest rate for the conservation fund = [(1+ 0,0659)^50] -1

50-year project effective real interest rate for the conservation fund = 2330,2%

When it has the cash flow of each thinning, and thinning will occur in the next 50 years, we can look for
the PV of future thinning on this schedule, which will be:

 PV thinning = 5000000/18,085

PV thinning = 276.469,34

The Operation Cash Flow of each harvest on the 50-year period are 17.944.836 so PV of future harvests
is :

 PV of future harvest = [(17.944.836 /18,085)]/ (1+0,0608)^30

PV of future harvest = 169.121,42

Now we can look for PV from conservation deposit fees. Value of conservation at harvest is:

 Value of conservation at harvest = -162.500-162.500/23,302

Value of conservation at harvest = -169.473,53

And the present value is

 PV of conservation fund = -169.473,53/(1,0659)^30

PV of conservation fund = -24.986,89

Thus, the 50-year harvest schedule’s NPV is

 NPV = 3.058.593 + 276.469,34 + 169.121,42 - 24.986,89

NPV = 3.479.196,45

Case 4: 55 years harvest schedule

Revenue $ 52.057.863
Tractor cost $ 12.670.000
Road $ 4.525.000
Sale preparation & admin $ 1.629.000
Excavator piling $ 750.000
Broadcast burning $ 1.500.000
Site preparation $ 725.000
Planting costs $ 1.125.000
EBIT $ 29.133.863
Taxes $ 10.196.852
Net income (OCF) $ 18.937.011

PV of first harvest

 PV = Net income (OCF) /(1+r)^n

PV = 18.937.011 / ( 1+ 0,608)^35

PV = 2.403.388

Next thinning will occur in 55 years, and will reoccur at this same interval. The effective real interest rate
for this period is

 55-year project effective real interest rate = [(1+ 0,608)^55] -1

55-year project effective real interest rate = 2463,1%

The effective real interest rate for the conservation fund for this period is

 55-year project effective real interest rate for the conservation fund = [(1+ 0,0659)^55] -1

55-year project effective real interest rate for the conservation fund = 3243,6%

When it has the cash flow of each thinning, and thinning will occur in the next 55 years, we can look for
the PV of future thinning on this schedule, which will be:

 PV thinning = 5000000/24,631

PV thinning = 202.995,97

The Operation Cash Flow of each harvest on the 55-year period are 18.937.011 so PV of future harvests
is :

 PV of future harvest = [(18.937.011 /24,631)]/ (1+0,0608)^35

PV of future harvest = 97.575,62

Now we can look for PV from conservation deposit fees. Value of conservation at harvest is:

 Value of conservation at harvest = -162.500-162.500/32,436

Value of conservation at harvest = -167.509,87

And the present value is

 PV of conservation fund = -167.509,87/(1,0659)^35

PV of conservation fund = -17.950,88

Thus, the 55-year harvest schedule’s NPV is

 NPV = 2.403.388 + 202.995,97+ 97.575,62 - 17.950,88

NPV = 2.686.008,85

So the company should use the 40-year harvest period since the NPV.
Member of group :

Đinh Nguyễn Thanh Ngân Võ Lam Ngọc

Nguyễn Thu Hà Nguyễn Ngọc Yến Nhi

Mai Chấn Phong Trần Minh Chiến

Nguyễn Minh Chiến