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Worldwide Paper Company Case

Click toD Group edit Master subtitle style Paul Weaver Mohammed Wajiuddin Michael Dominguez Lilli Myers Briton Hitchins Venus Roldan
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Outline
v v v v v

Case Background Swot Analysis Problem Identification Data analysis Recommendation


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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 onsite 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 Practice
Blue Ridge Mill purchases

shortwood from the Shenandoah Mill


The Shenandoah mill is owned by

a competitor
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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

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PRIMARY BENEFITS OF NEW WOODYARD


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

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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Applying outdated WACC Wrong investment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


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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
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CASE INFORMATION
q

Operating savings :

(Buying shortwood) (Cost of producing shortwood) 2008

$2 million

Future $3.5 million

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CASE INFORMATION
q

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


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

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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
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q q

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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)

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FLOW CHART
1) Calculate WACC

2)

Calculate NPV, IRR, PI, MIRR

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3 )

Final Decisio n

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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

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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
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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) 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


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RECOMMENDATION
WACC NPV IRR 9.67% $0.72 million Updated Positive

MIRR

PI
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10.88% Greater than WACC 10.36% Greater than WACC 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 6/26/12 Woodyard

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QUESTIONS

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THANK YOU

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