Chapter 9

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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+ .0659)40] ¨C1
40-year conservation interest rate =1,183.87%

Present value of future thinning on this schedule, which will be;

PV Harvest = [($ 14,628,413/9.5817)] / (1+ .0608)20
PV Harvest = $469,325.52
 
Present value of conservation funds deposit
PV Conservation = ¨C$162,500 ¨C$162,500/11.8387
PV Conservation = ¨C$176.226.22

Current value of conservation

PV Conservation = ¨C$176,226.22/ (1+ .0659)20
PV Conservation = ¨C$49,182.52
NPV of a 40-year harvest schedule is: 
NPV = $4,496,956 + 939,286.45 + 469,325.52 ¨C9,182.52

NPV = $5,856,385.29

45-year harvest schedule: Revenue $55,462,853

Tractor cost $9,840,000
Road $3,690,000
Sale preparation & admin $1,291,500
Excavator piling $1,200,000

Broadcast burning $2,287,500

Site preparation $1,162,500
Planting costs $1,800,000
EBIT $34,191,353
Taxes $11,966,973
Net income (OCF) $22,224,379

The PV of the first harvest in 25 years is:
PV first = $22,224,379/ (1+ .0608)
25PVFirst = $5, 087, 23
45 year interest rate
45-year project interest rate = [(1+ .0608)45] ¨C1
45-year project interest rate =1,321.11%

45 year interest rate for the conservation fund

45-year conservation interest rate = [(1+ .0659)45] ¨C1
45-year conservation interest rate = 1,666.38%

PV of future thinning

PV Thinning = $9,000,000/13.111
PV Thinning = $681,246.84

Utilizing the OCF of $22,024,504, the PV are as follow,

PV Harvest = [($22,224,379/13.21111)] / (1+ .0608)25
PV Harvest = $385,073.30

The present value of these deposits is:

PV Conservation = ¨C$162,500 ¨C $162,500/16.6638
PV Conservation = ¨C$174,800.29

NPV of a 45-year harvest schedule is:

NPV = $5,087,231+ 681.246.84 + 385,073.30 ¨C 35, 458, 26
NPV = $6, 1118,092.40

 
50-year harvest schedule:

Revenue $64,610,783
Tractor cost $11,280,000
Road $4,230,000
Sale preparation & admin $1,480,500
Excavator piling $1,200,000
Broadcast burning $2,287,500
Site preparation $1,162,500
Planting costs...
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