Bunyan Lumber in Order to Determine the Essay

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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…

Sources Used in Document:

References:

Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2011). Corporate Finance: Core Principles & Application (3rd ed.). New York, NY: McGraw-Hill/Irwin

No author. (2011). Net present value -- NPV. Investopedia. Retrieved January 28, 2012 from http://www.investopedia.com/terms/n/npv.asp#axzz1kmQexa4w

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