Bunyan Lumber LLC harvests timber and delivers logs to timber mills for sale The company was founded 70 years ago by Pete Bunyan?

Bunyan Lumber, LLC, harvests timber and delivers logs to timber mills for sale. The company was founded 70 years ago by Pete Bunyan. The current CEO is Paula Bunyan, the granddaughter of the founder. The company is currently evaluating a 7,500-acre forest it owns in Oregon. Paula has asked Steve Boles, the company's finance officer, to evaluate the project. Paula's concern is when the company should harvest the timber.

Lumber is sold by the company for its "pond value." Pond value is the amount a mill will pay for a log delivered to the mill location. The price paid for logs delivered to a mill is quoted in dollars per thousands of board feet (MBF), and the price depends on the grade of the logs. The forest Bunyan Lumber is evaluating was planted by the company 20 years ago and is made up entirely of Douglas fir trees. The table below shows the current price per MBF for the three grades of timber the company feels will come from the stand:

Timber Grade Price Per MBF

1P $1,150

2P $ 990

3P $ 840

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

The major decision the company faces is when to log the forest. When the company logs the forest, it will immediately replant saplings, which will allow for a future harvest. The longer the forest is allowed to grow, the larger the harvest becomes per acre. Additionally, an older forest has a higher grade of timber. Steve has compiled the following table with the expected harvest per acre in thousands of board feet, along with the breakdown of the timber grade.

Years from today to Harvest (MBF) Timber Grade

begin harvest per acre 1P 2P 3P

20 6 10% 40% 50%

25 8.2 13 46 41

30 9.4 17 48 35

40 10.5 19 51 30

The company expects to lose 5 percent of the timber it cuts due to defects and breakage.

Question: When should the company harvest the forest?

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