Bunyan Lumber in Order to Determine the

Bunyan Lumber In order to determine the best time to harvest the timber, the data needs to be organized and calculations performed for each of the different potential start times. Sunk costs/decisions such as the decision to thin the trees now are not included in the calculation, because the decision of when to cut the trees does not affect the decision to thin the forest. The other information presented in the case is valid, including the tax rate.

The latter is important because it is not necessarily going to be charged each year -- for example if the company posts a loss there will be no taxes. When using net present value to make a decision such as this, the rule of thumb is that any project with a positive NPV is good, but that when the options are mutually exclusive then the option with the highest NPV should be selected. In this situation, the four options are clearly mutually exclusive.

The calculation must take into account inflation, which is the same rate for everything except the conservation cost. The calculation must also factor in the changes in the timber quality, a variable that will affect the bottom line because of the different prices for the different timber. It stands to reason that there is economic incentive for the firm to cut at a point where the timber will have the highest percentage of 1P timber.

However, the time value of money is an important consideration here because that could diminish the present value of these future cash flows. It cannot be assumed that the higher net cash flow is going to be the higher net present value. Thus, the calculation was conducted in Excel in order to illustrate which of the four options is the best option for the Bunyan Lumber company.

The NPV calculations for the four harvesting options are as follows: 20-Year 25-Year 30-Year 35-Year 1P Price 2051 2P Price 1979 3P Price MBF, net 51300 66975 80513 86925 Revenue 58060165 91415661 132119933 171492089 Cost of Logging 17310140 27101275 39069162 50583545 Cost of Road 6700699 10490816 15123547 19580727 Sales/Admin 2345245 3671786 5293241 6853255 Reforesting 13184247 15810627 18960199 22737183 Conservation 563268 659346 771813 903464 Pre-Tax Flows 17956565 33681810 52901972 70833915 Tax 6284798 11788634 18515690 24791870 Net Income 11671768 21893177 34386282 46042044 PV 1734934 2020653 1970628 1638365 The finding of the calculation is that the timber should be harvested in the 25th year. This is option has the highest rate of return given the assumptions. The worst time to harvest the timber is the 35th year.

This decision derives from the rule of thumb that when choosing among options that are mutually exclusive, the option with the highest net present value should be selected.