Question 8 (10 points) You\'ve been hired as a Consultant to the Big Yellow Timb

Question

Question 8 (10 points) You've been hired as a Consultant to the Big Yellow Timber Company. Big Yellow recently harvested a plot of land and is considering replanting the plot with trees designated for future harvest. If Big Yellow replants, Table 3 below gives the yearly projected growth profile of timber volume (in cubic feet). The projected price of timber is $1/cubic foot for the foreseeable future. Big Yellow's cost of capital (i.e., it's discount rate) is 4% annually. Table 3 Years from Now 0 (Now) Volume of Timber (in cubic feet) 1000 1050 1155 1328 1594 1833 2016 2117 2181 2225 Assuming Big Yellow replants, when should they harvest? If replanting costs $1,000, what is the net present value (NPV) of replanting and harvesting? Given the replanting costs from part b., would you recommend replanting? (Your answer should refer back to your net present value calculation from b.). _G_B If replanting costs $2,000, what is the net present value (NPV) of replanting and harvesting? Given the replanting cost from part d, would you recommend replanting in this case? (Your answer should refer back to the net present value calculation from d.). How would you answer e. if the projected price of a cubic foot of timber were $2/cubic foot rather than $1/cubic foot (and replanting costs are still $2,000)?

Explanation / Answer

a) They should harvest from now itself as there is increasing in volume every year.

b)

1021.827436

Therefore, NPV of replanting and harvesting = 1021.8274-1000 = 21.8274 (price=$1/Cubic metre)

c) Since, NPV >0, Replanting is recommended.

d) If replanting cost is 2000, NPV = 1021.8274-2000 = -978.1726

e) Since NPV is negative, Replanting is not recommended.

f)

NPV = 2043.6549-2000 = 43.6549

Since NPV is +ve, replanting is recommended.

Year Cumulative Volume Year's Volume PV Factor Dicounted Cash Flows 0 1000 1 1050 50 0.9615385 48.07692308 2 1155 105 0.9245562 97.07840237 3 1328 173 0.8889964 153.7963701 4 1594 266 0.8548042 227.3779148 5 1833 239 0.8219271 196.4405785 6 2016 183 0.7903145 144.6275582 7 2117 101 0.7599178 76.75169913 8 2181 64 0.7306902 46.76417312 9 2225 44 0.7025867 30.91381637 Total

1021.827436

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