Producing hardwood dimension parts directly from logs: an economic feasibility study
1995
Lin, W.J. | Kline, D.E. | Araman, P.A. | Wiedenbeck, J.K.
The economic feasibility and profitability of a direct processing system for converting Factory Grades 2 and 3 red oak logs directly into rough dimension parts were evaluated. Net present value (NPV) and internal rate of return (IRR) were used as the measurement of economic feasibility, and return on sales (ROS) was used as the measurement of profitability. NPV and IRR were estimated based on the predicted after-tax cash flow for a 10-year period. The results of this study indicate that converting Grade 2 and Grade 3 red oak logs directly into rough dimension parts is economically feasible. Under the given assumptions, an initial capital expenditure of $5.25 million to build a direct processing mill to process Grade 2 red oak logs can generate a $4.43 million NPV with an IRR of 27.5 percent. An initial investment of $4.42 million to build a direct processing mill to process Grade 3 red oak logs can generate a $3.93 million NPV with an IRR of 28.2 percent. It was found that the direct processing system is much more profitable than current sawmills and dimension mills. The predicted ROS values of the direct processing mills are 7 to 12 percent higher then the average upper quartile ROS values achieved by the hardwood sawmill industry and by the hardwood dimension and flooring industry from 1983 to 1992. A sensitivity analysis indicates that dimension part price, green cutting yield, and drying degrade and remanufacturing loss are the three most important factors affecting the economic feasibility and profitability of the direct processing systems. If the drying degrade and remanufacturing loss is too high, the proposed direct processing system may not be able to achieve its high profit potential.
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