Harvest the forest analyzing the pros and cons

Assignment Help Financial Accounting
Reference no: EM1310689

Calculation of Time period when the company should harvest the forest analyzing the pros and cons.

Bunyan Lumber, LLC, harvests timber and delivers logs to timber mils 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 7,500 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 it "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 feel (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 below 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

$1,150

2P

$ 990

3P

$ 840

 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 $1,200 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 feet, along with the breakdown of the timber grade.

YEARS FROM TODAY TO BEGIN HARVEST

HARVEST (MBF) PER ACRE

TIMBER GRADE

 

 

1P

2P

3P

20

6

10%

40%

50%

25

6.2

13

46

41

30

9.4

17

48

35

35

10.5

19

51

30

The company expects to lose 5% 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 $160 per MBF.   A road system has to be constructed and is expected to cost $60 per MBF on average.  Sales preparation and administrative costs, excluding office overhead costs, are expected to be $21 per MBF.

As soon as the harvesting is complete, the company will reforest the land.  Reforesting costs include the following:

 

PER ACRE COST

Excavator piling

$ 160

Broadcast burning

$ 305

Site preparation

$ 155

Planting costs

$240

 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%, and the inflation rate is expected to be 3.7% per year.  Bunyan Lumber has a 35% 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 $250,000.  The company has agreed that the required contribution will grow by 3.2% per year.  When should the company harvest the forest?

Reference no: EM1310689

Questions Cloud

Evaluation of full charges and variable costs : Evaluation of Full charges, Variable costs, Market price & Negotiated price to be treated as Transfer Price.
Computing npv if discount rate is given : Briarcrest Condiments is spice-making firm. Newly, it developed new process for producing spices. Compute the NPV if discount rate is 13.74%?
Basic strategic planning questions : What the basic strategic planning questions must be addressed for the infrastructure? Suppose that x and y are “int” variables and “ch” is a char variable.
Description of the term paper : When Julian Rotter explained Kim, which of the given would you find in his description?
Harvest the forest analyzing the pros and cons : Calculation of Time period when the company should harvest the forest analyzing the pros and cons.
Characteristics that distinguish nfp from business : Identify characteristics that distinguish NFP from business enterprises. Specifically identify, from most important to least important, five accounting issues relevant to NFP financial reporting and explain your rationale by reference to existing ..
Show definition of finance and efficient market : Show Definition of Finance and Efficient Market and identification of their role in finance.
Communications between predecessor and prospective auditors : Assume that Smith & Smith CPAs audited Apollo shoes. Inc last year Now CEO Larry Lancaster wishes to engage Anderson, Olds, and Watershed, CPAs (HOW) to audit its annual financial statements.
College offering course on malwares : Is offering a college course on how to create computer viruses and other "malware" morally justified? Persuasively defend your answer by drawing upon appropriate theories and concepts you have studied during this course.

Reviews

Write a Review

Financial Accounting Questions & Answers

  Financial statement analysis and preparation

Financial Statement Analysis and Preparation

  Shareholder of a company

Describe the ways that a person can become a shareholder of a company. Why Wal-Mart would split its stock?

  Financial and accounting principles

An understanding of financial and accounting principles can be a valuable tool for managers. While not all managers will find themselves calculating financial ratios or preparing annual financial data.

  Prepare a statement of cash flow using the direct method

Prepare a Statement of Cash Flow using the Direct Method and Prepare the Operations section of the Statement of Cash Flow using the Indirect Method.

  Financial accounting assignment

This assignment has one case study and two question apart from case study. Questions related to document Liquidation question and Company financial statements question - Torquay Limited

  Prepare general journal entries for goela

Prepare general journal entries for Goela Ltd

  Principles of financial accounting

Prepare the journal entry to record the acquisition of the assets.

  Prepare general journal entries to record the transactions

Prepare general journal entries to record the transactions, assuming use of the periodic inventory system

  Global reporting initiative

Compare the view espoused by the economist Milton Friedman about the social responsibilities of business with the views express by Stigler.

  Explain the iasb conceptual frameworks

Explain the IASB Conceptual Framework's perspective of users and their decisions.

  Determine the company''s financial statements

T he focus of the report is to determine the extent to which you are comfortable relying on the financial statements as presented by management .

  Computation of free cash flow

Computation of Free Cash Flow

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd