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Worldwide Paper Company

542 words - 3 pages

Worldwide Paper Company
Background On December 2006, Bob Prescott, controller for the Blue Ridge Mill, was considering the addition of a new on-site longwood woodyard. This will bring two benefits: Eliminate purchase of shortwood from outside and the company will have the opportunity to sell shortwood to the open market. Also, this addition will reduce its operating costs and will increase it revenues. Shenandoah Mill manufactures the shortwood and it’s owned by the competitor. It has the capacity to have excess and sell it to different mills such as Blue Ridge Mill. Case information The new woodyard would begin operating in 2008 and the investment would be spent over two calendar years: $16 million in 2007 and the remaining $2 million in 2008. After 2008, when ...view middle of the document...

If the revenues increase, the inventories and accounts receivables would also increase. The Net Working Capital is 10% of annual revenues and at the end of life equipment, in 2013; the NWC will be recovered, whereas only 10% or $1.8 million of the capital investment would be recoverable. Taxes would be paid at a 40%, Straight-line depreciation (over the six-year life) with zero salvage value. Depreciation charges begin until 2008 after $18 million are spent. Because he don’t have a good feel of how inflation would affect his analysis, he decided not to include it. WPC had a company policy where corporate cost of capital is 15% to analyze investment opportunities since ten years ago. Prescott is uncomfortable because this was computed 30-year Treasury bonds were yielding 10%, whereas today is less than 5%. Problem The problem comes out when we want to see 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? What will the current WACC be? Data Analysis SWOT Analysis

On strengths we have strong sale supports; revenues will give you the healthiness to the company and therefore WACC will decrease. We have some weaknesses if a outdated WACC is applied and wrong investment decisions can be made due to the incorrect WACC. The opportunities are shown up with the new machine; it might decrease the operating cost. Also, revenues can increase from the excess capacity. The only thread we have is the competitor, the Shenandoah Mill.

Recommendation With a WACC of 9.67%, the Net Present Value is Positive; the Internal Rate of Return is bigger than the WACC (10.88 > 9.67). With these results definitely Blue Ridge Mill should invest on the project.

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