stillneedpaper inc raises trees cuts the trees into logs an 272713

Stillneedpaper, Inc., raises trees, cuts the trees into logs, and processes the logs into paper. Stillneedpaper, Inc., sells the paper to a distributor, who then sells the paper to printers. Assume that a weighted average cost of capital of 10 percent is appropriate for timber and paper processing. Here are the costs and revenues of each stage of the value chain. All data are for the production of enough timber to produce 20,000 tons of paper.

Timber The estimated market value of timber assets at the beginning of the year is $5,400,000 and at the end of the year is $5,000,000. Revenues, if the timber were sold in the market, would equal $2,100,000. Operating costs total $1,500,000, excluding depreciation.

Paper Processing The estimated market value of paper processing assets at the beginning of the year is $15,000,000 and $13,000,000 at the end of the year. Revenues, if the paper were sold in the market, would be $12,000,000. Operating costs total $8,700,000, including all costs of materials but excluding depreciation.

Distributor The distributor sells the paper for $800 per ton. The cost of the paper to the distributor (cost of goods sold) can be found by reviewing the sales from paper processing. Operating costs total $135 per ton, including economic depreciation. The cost of capital for the distributor is $50 per ton.

Retailer The retailer sells the paper for $850 per ton. The cost of the paper to the retailer (cost of goods sold) can be found by reviewing the sales from the distributor. Operating costs total $25 per ton, including economic depreciation. The cost of capital for the retailer is $18 per ton.

a. Compute the profits of each stage of the value chain. Show amounts in total (for 20,000 tons) and per ton.

b. Assume you are advising a loan approval committee in a bank. Write a short memo to the loan approval committee in which you evaluate the profitability of each part of the value chain.

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