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Worldwide Paper Company Case
Group DPaul Weaver Mohammed
Wajiuddin Michael Dominguez Lilli Myers
Briton HitchinsVenus Roldan
1
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
3
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WEAKNESSESApplying outdated WACC Wrong investment decisions in past due to incorrect WACC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