Worldwide Paper Company 6e6w1r
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Worldwide Paper Company Case Click toDedit Master subtitle style Group Paul Weaver Mohammed Wajiuddin Michael Dominguez Lilli Myers Briton Hitchins Venus Roldan 6/26/12
11
Outline v
Case Background
v
Swot Analysis
v
Problem Identification
v
Data analysis
v
Recommendation
6/26/12
22
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 ØBlue Ridge Mill purchases
shortwood from the Shenandoah Mill ØThe 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)
v
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
6/26/12
Sell shortwood in open market
77
SWOT ANALYSIS STRENGTHS
WEAKNESSES
Strong Sale
q
Decreasing Wacc
q
q
q
Applying outdated WACC Wrong investment
decisions in past due to incorrect WACC
OPPORTUNITIES New machine might
THREATS Competition from
q
q
decrease the operating
Shenandoah mill
cost Independence from the
q
6/26/12
current supplier
88
CASE INFORMATION q
The new woodyard would begin operating in 2008
q
Investment ($18 million)outlay would be spent over two calendar years: 2007 2008 $16 million
6/26/12
$ 2 million 99
CASE INFORMATION q
Operating savings :
(Buying shortwood) – (Cost of producing shortwood)2008
$2 million
6/26/12
Future $3.5 million
1010
CASE INFORMATION q
Expected revenues ($ million) by selling shortwood on open market : 2008
2009
2010
2011
2012
2013
$4
$10
$10
$10
$10
$10
6/26/12
1111
CASE INFORMATION q
Cost of Capital = 75% of revenue
q
SG&A = 5% of revenue
q
Tax rate = 40%
q
Straight-line depreciation ( over the six year life) with zero salvage value
q
Net Working capital = 10% annual revenue
q
Depreciation charges begin after the total $18 million outlay and machinery starts the service
6/26/12
1212
PROBLEM IDENTIFICATION 1)
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-
6/26/12
1313
FLOW CHART
6/26/12
1)
Calculate WACC
2)
Calculate NPV, IRR, PI, MIRR
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
v
WPC has not changed its WACC in 10 years
q
NPV = ($2.14) (Negative)
q
View Worldwide Paper Company.xls here
6/26/12
1616
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)
Current WACC = 9.67%
2)
NPV = $0.72 million
3)
IRR =10.88%
4)
PI= 1.045
5)
MIRR = 10.36% EXCEL HAS MAGIC
Worldwide Paper Company-1.xlsx 6/26/12
1919
RECOMMENDATION WACC
9.67%
Updated
NPV
$0.72 million
Positive
IRR
10.88% Greater than WACC 10.36% Greater than WACC 1.045 Greater than 1
MIRR
PI 6/26/12
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
11
Outline v
Case Background
v
Swot Analysis
v
Problem Identification
v
Data analysis
v
Recommendation
6/26/12
22
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 ØBlue Ridge Mill purchases
shortwood from the Shenandoah Mill ØThe 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)
v
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
6/26/12
Sell shortwood in open market
77
SWOT ANALYSIS STRENGTHS
WEAKNESSES
Strong Sale
q
Decreasing Wacc
q
q
q
Applying outdated WACC Wrong investment
decisions in past due to incorrect WACC
OPPORTUNITIES New machine might
THREATS Competition from
q
q
decrease the operating
Shenandoah mill
cost Independence from the
q
6/26/12
current supplier
88
CASE INFORMATION q
The new woodyard would begin operating in 2008
q
Investment ($18 million)outlay would be spent over two calendar years: 2007 2008 $16 million
6/26/12
$ 2 million 99
CASE INFORMATION q
Operating savings :
(Buying shortwood) – (Cost of producing shortwood)2008
$2 million
6/26/12
Future $3.5 million
1010
CASE INFORMATION q
Expected revenues ($ million) by selling shortwood on open market : 2008
2009
2010
2011
2012
2013
$4
$10
$10
$10
$10
$10
6/26/12
1111
CASE INFORMATION q
Cost of Capital = 75% of revenue
q
SG&A = 5% of revenue
q
Tax rate = 40%
q
Straight-line depreciation ( over the six year life) with zero salvage value
q
Net Working capital = 10% annual revenue
q
Depreciation charges begin after the total $18 million outlay and machinery starts the service
6/26/12
1212
PROBLEM IDENTIFICATION 1)
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-
6/26/12
1313
FLOW CHART
6/26/12
1)
Calculate WACC
2)
Calculate NPV, IRR, PI, MIRR
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
v
WPC has not changed its WACC in 10 years
q
NPV = ($2.14) (Negative)
q
View Worldwide Paper Company.xls here
6/26/12
1616
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)
Current WACC = 9.67%
2)
NPV = $0.72 million
3)
IRR =10.88%
4)
PI= 1.045
5)
MIRR = 10.36% EXCEL HAS MAGIC
Worldwide Paper Company-1.xlsx 6/26/12
1919
RECOMMENDATION WACC
9.67%
Updated
NPV
$0.72 million
Positive
IRR
10.88% Greater than WACC 10.36% Greater than WACC 1.045 Greater than 1
MIRR
PI 6/26/12
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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