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Bunyan Lumber, LLC, harvests timber and delivers logs to timber mils for sale. Company was founded 70 years ago by Pete Bunyan. Present CEO is Paula Bunyan, granddaughter of founder. Company is prsently estimating  7,500 acre forest it owns in Oregon.  Paula has asked Steve Boles, company's finance officer, to estimate the project.  Paula's concern is when company must harvest timber.

Lumber is sold by company for it "pond value".  Pond value is amount a mill will pay for log delivered to mill location. Price paid for logs delivered to mill is quoted in dollars per thousands of board feel (MBF), and price depends on grade of logs. Forest Bunyan Lumber is estimating was planted by company 20 years ago and is made up completely of Douglas fir trees.  Table given below illustrates the present price per MBF for three grades of timber company feels will come from stand.

TIMBER GRADE

PRICE PER MBF

1P

$1,150

2P

$ 990

3P

$ 840

Steve believes that pond value of lumber will increase at inflation rate. Company is planning to thin forest today, and it expects to realize positive cash flow of $1,200 per acre from thinning. Thinning is done to increase growth rate of the remaining trees, and it is always done 20 years following a planting.

Major decision company faces is when to log forest.  When company logs forest, it will immediately replant saplings, which will permit for future harvest. Longer forest is allowed to grow, larger the harvest becomes per acre.  In addition, older forest has higher grade of timber. Steve has compiled following table with expected harvest per acre in thousands of board feet, along with breakdown of 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

Company expects to lose 5% of timber it cuts due to defects and breakage.

Forest will be clear-cut when company harvests timber. This method of harvesting permits for faster growth of replanted trees. All of the harvesting, processing, replanting, and transportation are to be handled by subcontractors hired by Bunyan Lumber.  Cost of logging is expected to be $160 per MBF.  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 harvesting is complete, company will reforest land.  Reforesting costs comprise the following:

 

PER ACRE COST

Excavator piling

$ 160

Broadcast burning

$ 305

Site preparation

$ 155

Planting costs

$240

 All costs are expected to increase at inflation rate.

Suppose all cash flows happen at year of harvest.  For ex, if company begins harvesting the timber 20 years from today, cash flow from harvest will be received 20 years from today. When company logs land, it will immediately replant land with new saplings.  Harvest period selected will be repeated for foreseeable future. Company's nominal required return is 10%, and inflation rate is expected to be 3.7% per year.  Bunyan Lumber has a 35% tax rate.

Clear-cutting is controversial method of forest management. To get the essential permits, Bunyan Lumber has agreed to contribute to conservation fund every time it harvests lumber.  If company harvested forest today, the required contribution would be $250,000. Company has agreed that required contribution will grow by 3.2% per year.  When must the company harvest forest?

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M917823

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