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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

77

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WEAKNESSESqApplying outdated WACC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)

1010

2008 Future$2 million $3.5 million

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CASE INFORMATIONq Expected revenues ($ million) by

selling shortwood on open market :

1111

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