Risk Analysis, Real Options, and Capital Budgeting

MINI CASE CHAPTER 7

BUNYAN LUMBER, LLC

MAHDE KUMAR
041914353033
MATERIAL
 Total acreage 5,000
Years since original planting 20
1P pond value $ 645
2P pond value $ 620
3P pond value $ 605
Cash flow/acre from thinning $ 1,200

Years from today for harvest to begin Harvest (MBF) per

Acre 1P 2P 3P
20 15.1 14% 32% 54%

Defect rate 5%
Tractor cost (MBF) $ 145
Road (MBF) $ 50
INPUT AREA Sale preparation and administrative (MBF) $ 18

Excavator piling/acre $ 155

Broadcast burning/acre $ 305
Site preparation/acre $ 150
Planting costs/acre $ 230

Nominal required return 10.0%

Inflation rate 3.7%
Tax rate INPUT AREA 21.0%

Conservation fund $ 500,000

Conservation fund growth 3.2%
 Real required return 6.08%

Cash flow from thinning $ 6,000,000

Harvest in (Years ) 20

Revenue $ 44,139,565
Tractor cost $ 10,947,500
Road $ 3,775,000
Sale preparation & admin $ 1,359,000
Excavator piling $ 775,000
Broadcast burning $ 1,525,000
Site preparation $ 750,000
Planting costs $ 1,150,000
EBIT $ 23,858,065
Taxes $ 5,010,194

OUTPUT AREA Net income (OCF)

PV of first harvest
$

$
18,847,871

5,794,070

Next thinning will occur in 40

The effective real interest rate for this period is 958.2%
The real rate in the conservation fund is 6.59%
The effective real interest rate for the
conservation fund for this period is 1183.9%

Aftertax cost of convservation $ (395,000.00)

Value of conservation at harvest $ (428,365.28)

PV of future thinnings $ 626,190.97

PV of future harvests $ 604,699.04
PV of conservation fund $ (119,551.36)

Total NPV $ 6,905,408.59

 Real required return 6.08% 6.08% 6.08% 6.08%

Cash flow from thinning $ 6,000,000 $ 6,000,000 $ 6,000,000 $ 6,000,000

Harvest in (Years ) 20 25 30 35

Revenue $ 44,139,565 $ 51,209,940 $ 53,659,515 $ 55,808,629

Tractor cost $ 10,947,500 $ 12,615,000 $ 13,195,000 $ 13,702,500
Road $ 3,775,000 $ 4,350,000 $ 4,550,000 $ 4,725,000
Sale preparation & admin $ 1,359,000 $ 1,566,000 $ 1,638,000 $ 1,701,000
Excavator piling $ 775,000 $ 775,000 $ 775,000 $ 775,000
Broadcast burning $ 1,525,000 $ 1,525,000 $ 1,525,000 $ 1,525,000
Site preparation $ 750,000 $ 750,000 $ 750,000 $ 750,000
Planting costs $ 1,150,000 $ 1,150,000 $ 1,150,000 $ 1,150,000
EBIT $ 23,858,065 $ 28,478,940 $ 30,076,515 $ 31,480,129
Taxes $ 5,010,194 $ 5,980,577 $ 6,316,068 $ 6,610,827
Net income (OCF) $ 18,847,871 $ 22,498,363 $ 23,760,447 $ 24,869,302

RESUME PV of first harvest $ 5,794,070 $ 5,149,946 $ 4,049,830 $ 3,156,284

Next thinning will occur in 40 45 50 55

The effective real interest rate for this period is 958.2% 1321.11% 1808.52% 2463.10%
The real rate in the conservation fund is 6.59% 6.59% 6.59% 6.59%
The effective real interest rate for the
conservation fund for this period is 1183.9% 1666.4% 2330.2% 3243.6%

Aftertax cost of convservation $ (395,000.00) $ (395,000.00) $ (395,000.00) $ (395,000.00)

Value of conservation at harvest $ (428,365.28) $ (418,704.06) $ (411,951.03) $ (407,177.83)
$ -
PV of future thinnings $ 626,190.97 $ 454,164.56 $ 331,763.21 $ 243,595.16
PV of future harvests $ 604,699.04 $ 389,820.51 $ 223,930.74 $ 128,142.59
PV of conservation fund $ (119,551.36) $ (84,934.18) $ (60,737.37) $ (43,634.45)
$ -
Total NPV $ 6,905,408.59 $ 5,908,997.10 $ 4,544,786.10 $ 3,484,387.37
 Bunyan Lumber, LLC should
harvest the forest at Years 20th
because based on calculation of
CONCLUTION revenue, costs and inflation has
biggest NPV of Return is
$ 6,905,408.59
THANK YOU