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6/26/12
Worldwide Paper Company Case
Group DPaul Weaver Mohammed Wajiuddin Michael Dominguez Lilli Myers Briton HitchinsVenus Roldan
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Outlinev Case Background
v Swot Analysis
v Problem Identification
v Data analysis
v Recommendation22
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The Case Background
v 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 Investment
New Woodyard
Utilizes a new technology that allows tree-length logs, called longwoods to be processed directly
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Current PracticeØBlue Ridge Mill purchases shortwood from the Shenandoah Mill
ØThe Shenandoah mill is owned by a competitor
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Advantages of the Investmentv Eliminates the need to purchase
shortwood from an outside supplier (Shenandoah Mill)
v Opportunity grow 0to sell shortwood on the open market as a new market
v Reduces operating cost and increases revenue 66
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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
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SWOT ANALYSISSTRENGTHS
qStrong Sale support
qDecreasing Wacc
WEAKNESSESqApplying outdated WACC
qWrong investment
decisions in past due to
incorrect WACC
OPPORTUNITIESqNew machine might
decrease the operating
cost
qIndependence from the
current supplier
qIncreased revenue from
excess capacity
THREATSqCompetition from
Shenandoah mill
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CASE INFORMATIONq The new woodyard would begin
operating in 2008
q Investment ($18 million)outlay would be spent over two calendar years:
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2007 2008$16 million $ 2 million
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CASE INFORMATIONq Operating savings :
(Buying shortwood) – (Cost of producing
shortwood)
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2008 Future$2 million $3.5 million
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CASE INFORMATIONq Expected revenues ($ million) by
selling shortwood on open market :
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2008 2009 2010 2011 2012 2013
$4 $10 $10 $10 $10 $10
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CASE INFORMATIONq Cost of Capital = 75% of revenue
q SG&A = 5% of revenue
q Tax rate = 40%
q Straight-line depreciation ( over the six year life) with zero salvage value
q Net Working capital = 10% annual revenue
q 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?
1) 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 Decisio
n
Calculate WACC
Calculate NPV, IRR, PI, MIRR
1)
2)
3)
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DATA ANALYSIS- CASH FLOWq 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
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DATA ANALYSIS- OUTDATED WACCq WACC = 15%
v WPC has a company policy to use its corporate Cost of Capital to analyze investment opportunities
v WPC has not changed its WACC in 10 years
q NPV = ($2.14) (Negative)
q View Worldwide Paper Company.xls here
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DATA ANALYSIS-UPDATED WACC
q 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 million
3) IRR =10.88%
4) PI= 1.045
5) MIRR = 10.36%
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Worldwide Paper Company-1.xlsxEXCEL HAS
MAGIC
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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
q 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” 2121
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QUESTIONS
2222
THANK YOU