Case 19 World Wide Paper..pptx
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World Wide Paper Company Azur Salihefendic, Andrey Egorov, Steven Richie
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Transcript of Case 19 World Wide Paper..pptx
World Wide Paper
CompanyAzur Salihefendic, Andrey Egorov, Steven
Richie
Agenda
•Background• The Investment Details•Yearly cash flows•Recommended Discount Rate•NPV & IRR?•Decision?•Questions
Background
•Blue Ridge Mill •New Wood yard•Costs vs Benefits
The Investment Details
•$ 18M•Cost of good sold - 75% sales• SG&A - 5%• Tax rate - 40%•Depreciation - $3M/year•Working capital yearly increase -10% sales
(recoverable)
What yearly cash flows are relevant for this investment decision?
2007 2008 2009 2010 2011 2012 2013
Investment- 16 000 000,00
- 2 000 000,00
Sales revenue increase -
4 000 000,00
10 000 000,00 10 000 000,00 10 000 000,00 10 000 000,00 10 000 000,00
COGS - -3 000 000,00 -7 500 000,00 -7 500 000,00 -7 500 000,00 -7 500 000,00 -7 500 000,00
Gross Profit - 1 000 000,00 2 500 000,00 2 500 000,00 2 500 000,00 2 500 000,00 2 500 000,00
SG&A - -200 000,00 -500 000,00 -500 000,00 -500 000,00 -500 000,00 -500 000,00
Capex NWC - -400 000,00 -1 000 000,00 -1 000 000,00 -1 000 000,00 -1 000 000,00 -1 000 000,00
Operating savings - 2 000 000,00 3 500 000,00 3 500 000,00 3 500 000,00 3 500 000,00 3 500 000,00
Depreciation - -3 000 000,00 -3 000 000,00 -3 000 000,00 -3 000 000,00 -3 000 000,00 -3 000 000,00
EBIT - -600 000,00 1 500 000,00 1 500 000,00 1 500 000,00 1 500 000,00 1 500 000,00
Taxes 240 000,00 -600 000,00 -600 000,00 -600 000,00 -600 000,00 -600 000,00
Net income -360 000,00 900 000,00 900 000,00 900 000,00 900 000,00 900 000,00
Cash inflow 2 640 000,00 3 900 000,00 3 900 000,00 3 900 000,00 3 900 000,00 3 900 000,00
6 480 000,00
Free cash flow- 16 000 000,00
640 000,00
3 900 000,00
3 900 000,00
3 900 000,00
3 900 000,00
10 380 000,00
What discount rate should Worldwide Paper Company (WPC) use to analyze those cash
flows? • Investment opportunities rate 15%•Old calculation•30 year Treasury bonds 10%, today 5%
Free cash flow- 16 000 000,00
640 000,00 3 900 000,00 3 900 000,00 3 900 000,00 3 900 000,00 10 380 000,00
1/(1+k)n 15% 1,0000 0,7561 0,6575 0,5718 0,4972 0,4323 0,3759
Net present Value 15%- 16 000 000,00 483 904,00 2 564 250,00 2 230 020,00 1 939 080,00 1 685 970,00 3 901 842,00
Total NPV- 3 194 934,00
WACC calculation
Cost of Capital Rf 10-year gov bonds 4,6%Beta 1,1Market Risk premium 6%Cost of Capital 11,2%
Cost of debtBank loan rates Libor 5,38%S-term rate (Libor+1) 6,38%S-term debt portion 16,67%L-term debt portion 83,33%Cost of Debt 5,55%
Debt Bank loan 500 L-term debt 2500 Total Debt 3000
Equity Shares outstanding 500 Market value per share 24 Total Equity 12000 Debt portion 0,2 Equity portion 0,8WACC = Cost of D * (1-t)
Debt* Cost of E
Equity Debt + Equity Debt + Equity
9,6 %
What is the net present value (NPV) and internal rate of return (IRR) for the
investment?1/(1+k)n (9,6%) 0,91 0,83 0,76 0,69 0,63 0,58 0,53
NPV of cash flows - 14 595 131,06 532 544,63 2 960 251,82
2 700 328,96
2 463 228,44
2 246 946,37
5 455 235,08
Total NPV 1 763 404,23
Free cash flow - 16 000 000,00 640 000,00
3 900 000,00
3 900 000,00
3 900 000,00
3 900 000,00
10 380 000,00
NPV of cash
flows - 14 198 832,89 504 017,14
2 725 603,03
2 418 773,87
2 146 485,38
1 904 849,20
4 499 103,78
Total NPV - 0,50
IRR 0,13
Decision
•WACC < IRR
•Positive NPV
•The decision: Invest in the Woodyard.
Questions…
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