Worldwide Paper Company Case

Group DPaul Weaver Mohammed

Wajiuddin Michael Dominguez Lilli Myers

Briton HitchinsVenus Roldan

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OutlineCase Background

Swot Analysis

Problem Identification

Data analysis

Recommendation2

The Case Background

In December 2006,Bob Prescott, the controller for the Blue Ridge Mill, was considering the addition of a new on-site longwood woodyard

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New WOODYARD InvestmentNew Woodyard

Utilizes a new technology that allows tree-length logs, called longwoods to be processed directly

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Current PracticeBlue Ridge Mill purchases shortwood

from the Shenandoah Mill

The Shenandoah mill is owned by a competitor

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Advantages of the InvestmentEliminates the need to purchase shortwood

from an outside supplier (Shenandoah Mill)

Opportunity grow 0to sell shortwood on the open market as a new market

Reduces operating cost and increases revenue

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PRIMARY BENEFITS OF NEW WOODYARD

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New Woodyard Excess Capacity

Shortwoodfor pulp production

Sell shortwood in open market

SWOT ANALYSISSTRENGTHS

Strong Sale support

Decreasing Wacc

WEAKNESSESApplying outdated WACC Wrong investment decisions in past due to incorrect WACC

OPPORTUNITIESNew machine might decrease the operating costIndependence from the current supplierIncreased revenue from excess capacity

THREATSCompetition from Shenandoah mill

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CASE INFORMATIONThe new woodyard would begin operating in

2008

Investment ($18 million)outlay would be spent over two calendar years:

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2007 2008$16 million $ 2 million

CASE INFORMATIONOperating savings :

(Buying shortwood) – (Cost of producing shortwood)

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2008 Future$2 million $3.5 million

CASE INFORMATIONExpected revenues ($ million) by selling

shortwood on open market :

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2008 2009 2010 2011 2012 2013

$4 $10 $10 $10 $10 $10

CASE INFORMATION Cost of Capital = 75% of revenue SG&A = 5% of revenue Tax rate = 40% Straight-line depreciation ( over the six year life)

with zero salvage value Net Working capital = 10% annual revenue Depreciation charges begin after the total $18 million

outlay and machinery starts the service

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PROBLEM IDENTIFICATION1) What will the current WACC be?

2) Whether the expected benefits were enough to justify the $18million capital outlay plus the incremental investment in working capital over the six-year life of the investment?

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FLOW CHART

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Final Decision

Calculate WACC

Calculate NPV, IRR, PI, MIRR

1)

2)

3)

DATA ANALYSIS- CASH FLOW Cash Flow

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2007 2008 2009 2010 2011 2012 2013 Terminal value

($16) $0.48 $3.90 $4.50 $4.50 $4.50 $4.50 $2.08

DATA ANALYSIS- OUTDATED WACC WACC = 15%

WPC has a company policy to use its corporate Cost of Capital to analyze investment opportunities

WPC has not changed its WACC in 10 years

NPV = ($2.14) (Negative)

View Worldwide Paper Company.xls here

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DATA ANALYSIS-UPDATED WACC

Current WACC (US department of Treasure)

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PAST 30 YEARS

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DATA ANALYSIS-UPDATED WACC

1) Current WACC = 9.67%2) NPV = $0.72 million3) IRR =10.88% 4) PI= 1.0455) MIRR = 10.36%

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Worldwide Paper Company-1.xlsx EXCEL HAS MAGIC

RECOMMENDATION

WACC 9.67% Updated

NPV $0.72 million

Positive

IRR 10.88% Greater than WACC

MIRR 10.36% Greater than WACC

PI 1.045 Greater than 1

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RECOMMENDATION

Decision: The expected benefits are enough to justify

the $18million capital outlay plus the incremental investment in working capital over the six-year life of the investment

“Invest in the new longwood Woodyard”

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QUESTIONS

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THANK YOU