Chapter 9
Chapter 9 closing case
Ashford University
BUS 650 Managerial Finance
When should Bunyan Lumber, harvest the forest?
The cash flow will grow at the inflation rate of 3.7%. Utilizing the real cash flow formula
(1+R) =v (1+R)(1+H)
1.10 = (1+R)(1.037)
R= 6.08%
The conservation funds are anticipated to grow slower than the inflation rate. The return for the conservation fund will be,
(1+R) = (1+R) (1+H)
1.10 = (1+R) (1.032)
R= 6.5%
The cash flow from the thinning process is as follow,
Cash flow from thinning = Acres thinned x cash flow per acre
Cash flow from thinning = 7,500 ($1,200)
Cash flow from thinning = $9,000,000
Thinning beyond the initial thinning is conducted on a schedule and can be included.
After tax cost of the conservation fund will be,
After tax conservation fund cost = (1”C.35) ($250,000)
After tax conservation fund cost = $162,500
For each analysis the cost and revenue are;
Revenue [ E (% of grade )(harvest per acre)(value of board game)](acres harvested) (1”C defect rate)
Tractor cost = (Cost MBF)(MBF per acre)(acres)
Road cost = (Cost MBF)(MBF per acre)(acres)
Sale preparation and administration = (Cost MBF) (MBF acre) (acres)
It is assumed that there is no depreciation as a result of the harvest. This is an indicator that operating cash flow is equal to net income. The NPV of the thinning, the NPV of all future harvests, minus the present value of the conservation fund costs.
Revenue $39,800,250
Tractor cost 7,200,000
Road 2,700,000
Sale preparation & admin 945,000
Excavator piling 1,200,000
Broadcast burning 2,287,500
Site preparation 1162,500
Planting costs 1,800,000
EBIT $22,505,250
Taxes 7,876,838
Net income (OCF) $ 4,628,413
First harvest after 20 years
PV First = $14,628,413/ (1+ .0608)20
PV First = $4,496,956
Projection of thinning after 40 years
40-year project interest rate = [(1+ .0608)40] ¨C1
40-year project interest rate = 958.17%
40-year conservation interest rate = [(1+
Ashford University
BUS 650 Managerial Finance
When should Bunyan Lumber, harvest the forest?
The cash flow will grow at the inflation rate of 3.7%. Utilizing the real cash flow formula
(1+R) =v (1+R)(1+H)
1.10 = (1+R)(1.037)
R= 6.08%
The conservation funds are anticipated to grow slower than the inflation rate. The return for the conservation fund will be,
(1+R) = (1+R) (1+H)
1.10 = (1+R) (1.032)
R= 6.5%
The cash flow from the thinning process is as follow,
Cash flow from thinning = Acres thinned x cash flow per acre
Cash flow from thinning = 7,500 ($1,200)
Cash flow from thinning = $9,000,000
Thinning beyond the initial thinning is conducted on a schedule and can be included.
After tax cost of the conservation fund will be,
After tax conservation fund cost = (1”C.35) ($250,000)
After tax conservation fund cost = $162,500
For each analysis the cost and revenue are;
Revenue [ E (% of grade )(harvest per acre)(value of board game)](acres harvested) (1”C defect rate)
Tractor cost = (Cost MBF)(MBF per acre)(acres)
Road cost = (Cost MBF)(MBF per acre)(acres)
Sale preparation and administration = (Cost MBF) (MBF acre) (acres)
It is assumed that there is no depreciation as a result of the harvest. This is an indicator that operating cash flow is equal to net income. The NPV of the thinning, the NPV of all future harvests, minus the present value of the conservation fund costs.
Revenue $39,800,250
Tractor cost 7,200,000
Road 2,700,000
Sale preparation & admin 945,000
Excavator piling 1,200,000
Broadcast burning 2,287,500
Site preparation 1162,500
Planting costs 1,800,000
EBIT $22,505,250
Taxes 7,876,838
Net income (OCF) $ 4,628,413
First harvest after 20 years
PV First = $14,628,413/ (1+ .0608)20
PV First = $4,496,956
Projection of thinning after 40 years
40-year project interest rate = [(1+ .0608)40] ¨C1
40-year project interest rate = 958.17%
40-year conservation interest rate = [(1+