Case 18: Worldwide Paper Company

Synopsis and Objectives

The case is based on an actual investment decision made by a major paper-products company in the
1990s. The numbers and the company name have been disguised at the request of the company. The
dates have been revised for pedagogical reasons. The case provides a glimpse into the paper business but
is primarily designed to present a straightforward problem in assessing cash flows, cost of capital, and net
present value of a capital-investment decision. The case works well for all audiences who are learning the
basics of discounted cash flow and investment analysis.

The case touches on the following capital-investment topics:

Estimation of relevant cash flows (both cost savings and increased revenues)
Influence of taxes vis-à-vis cost savings and revenues
Change in net working capital as a cash flow
Component costs of capital as determined by current market conditions
Weighted-average cost of capital (WACC) as the discount rate for the average investment

Suggested Questions

1. What yearly cash flows are relevant for this investment decision? Do not forget the effect of
taxes and the initial investment amount.
2. What discount rate should Worldwide Paper Company (WPC) use to analyze those cash flows?
Be prepared to justify your recommended rate and the assumptions that you used to estimate it.
3. What is the net present value (NPV) and internal rate of return (IRR) for the investment?