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    The Worldwide Paper Company case considers investing $18 million over two years to build a new onsite longwood woodyard. The woodyard would eliminate the need to purchase wood from a competitor and generate excess capacity to sell wood on the open market. Updating the cost of capital from 15% to the current rate of 9.67% makes the investment positive, with an NPV of $0.72 million, IRR of 10.88%, MIRR of 10.36%, and PI above 1. It is recommended to invest in the new woodyard.

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    The Worldwide Paper Company case considers investing $18 million over two years to build a new onsite longwood woodyard. The woodyard would eliminate the need to purchase wood from a competitor and generate excess capacity to sell wood on the open market. Updating the cost of capital from 15% to the current rate of 9.67% makes the investment positive, with an NPV of $0.72 million, IRR of 10.88%, MIRR of 10.36%, and PI above 1. It is recommended to invest in the new woodyard.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
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    Download as pptx, pdf, or txt
    11K views22 pages

    Worldwide Paper Company

    Uploaded by

    roldanvenus
    The Worldwide Paper Company case considers investing $18 million over two years to build a new onsite longwood woodyard. The woodyard would eliminate the need to purchase wood from a competitor and generate excess capacity to sell wood on the open market. Updating the cost of capital from 15% to the current rate of 9.67% makes the investment positive, with an NPV of $0.72 million, IRR of 10.88%, MIRR of 10.36%, and PI above 1. It is recommended to invest in the new woodyard.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pptx, pdf, or txt
    of 22

    Worldwide Paper Company Case

    Click toD Group edit Master subtitle style Paul Weaver Mohammed Wajiuddin Michael Dominguez Lilli Myers Briton Hitchins Venus Roldan
    6/26/12 11

    Outline
    v v v v v

    Case Background Swot Analysis Problem Identification Data analysis Recommendation


    22

    6/26/12

    The Case Background


    v In December 2006,Bob Prescott, the

    controller for the Blue Ridge Mill, was considering the addition of a new onsite longwood woodyard

    6/26/12

    33

    New WOODYARD Investment

    New Woodyard

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

    6/26/12

    44

    Current Practice
    Blue Ridge Mill purchases

    shortwood from the Shenandoah Mill


    The Shenandoah mill is owned by

    a competitor
    6/26/12
    55

    Advantages of the Investment


    v

    Eliminates 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 6/26/12


    v

    66

    PRIMARY BENEFITS OF NEW WOODYARD


    New Woodyard Excess Capacity Shortwood for pulp production Sell shortwood in open market

    6/26/12

    77

    SWOT ANALYSIS
    STRENGTHS
    q

    WEAKNESSES

    Strong Sale support Decreasing Wacc

    Applying outdated WACC Wrong investment

    decisions in past due to incorrect WACC

    OPPORTUNITIES
    q

    THREATS
    q

    New machine might

    Competition from

    decrease the operating cost


    q

    Shenandoah mill

    Independence from the


    88

    6/26/12

    current supplier

    CASE INFORMATION
    q

    The new woodyard would begin operating in 2008 Investment ($18 million)outlay would be spent over two calendar years: 2007 2008
    $16 million $ 2 million
    99

    6/26/12

    CASE INFORMATION
    q

    Operating savings :

    (Buying shortwood) (Cost of producing shortwood) 2008

    $2 million

    Future $3.5 million

    6/26/12

    1010

    CASE INFORMATION
    q

    Expected revenues ($ million) by selling shortwood on open market :


    2008 $4 2009 $10 2010 $10 2011 $10 2012 $10 2013 $10

    6/26/12

    1111

    CASE INFORMATION
    q q q q

    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
    1212

    q q

    6/26/12

    PROBLEM IDENTIFICATION
    1)

    What will the current WACC be? Whether the expected benefits were enough to justify the $18million capital outlay plus the incremental investment in working capital over the six-

    1)

    6/26/12

    1313

    FLOW CHART
    1) Calculate WACC

    2)

    Calculate NPV, IRR, PI, MIRR

    6/26/12

    3 )

    Final Decisio n

    1414

    DATA ANALYSIS- CASH FLOW


    q

    Cash Flow
    2007 2008 2009 2010 2011 2012 2013
    Terminal value

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

    6/26/12

    1515

    DATA ANALYSIS- OUTDATED WACC


    q

    WACC = 15%
    v

    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
    1616

    6/26/12

    DATA ANALYSIS-UPDATED WACC


    q

    Current WACC (US department of Treasure)

    6/26/12

    1717

    PAST 30 YEARS

    6/26/12

    1818

    DATA ANALYSIS-UPDATED WACC


    1) 2) 3) 4) 5)

    Current WACC = 9.67% NPV = $0.72 million IRR =10.88% PI= 1.045 MIRR = 10.36%
    Worldwide Paper Company-1.xlsx

    EXCEL HAS MAGIC


    1919

    6/26/12

    RECOMMENDATION
    WACC NPV IRR 9.67% $0.72 million Updated Positive

    MIRR

    PI
    6/26/12

    10.88% Greater than WACC 10.36% Greater than WACC 1.045 Greater than 1
    2020

    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 6/26/12 Woodyard

    2121

    QUESTIONS

    6/26/12

    THANK YOU

    2222

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