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  1. 1. Table of Content
  2. 2. Background Selling paper products; production of supply In December 2006, Bob Prescott, the controller for the Blue Ridge Mill, considered the addition of a new on-site longwood woodyard. Blue Ridge Mill currently purchases its shortwood from the Shenandoah Mill
  3. 3. Data Analysis The new woodyard will begin operating in 2008 Total cost = $18 million dollars $16 million paid in 2007 $2 million paid in 2008 Operating savings: estimated to be $19.5 million throughout the equipments lifetime. $2 million for 2008 $3.5 million per year
  4. 4. Expected revenue: $4 million for 2008 reach $10 million in 2009 remain steady at the $10 million level through 2013 Costs of goods sold: 75% of revenues SG&A expenses 5% of revenues Net working capital: 10% of annual revenues Recovered: $400,000 worth of net working capital in 2008 $1.8 million (before taxes) from the capital investment
  5. 5. Case Question Q: Should theWorldwide Paper Company take the project? Would the expected benefits be enough to justify capital outlay plus the incremental investment in working capital over the six-year lifetime of the investment??
  6. 6. Weight of Debt and Equity What is the weight of total debt and total equity? Weight of Equity = 12,000/15,000 = 80% Weight of Debt 3,000/15,000 = 20% Total Capital Total Debt +Total Equity 12,000 +3,000 = 15.000 Billion Total Debt Long-Term Debt + Bank Loan Payable 2,500 + 500 = 3.000(Billion) Total Equity Shares Outstanding * MarketValue Per Share 500(million)*24 = 12.000 Billion
  7. 7. Cost of Debt and Cost of Equity Prescott used an outdated figure to calculate the discount rate Treasury yield was adjusted to represent current interest rates Cost of Debt and Cost of Equity Rf + Beta (Risk Premium) = 4.6% + 1.1 (6%) = 11.20% CAPM (loan/total debt)(bank loan rate +1%) + (long-term notes/total debt)(A Corporate bond yield) (500/3000)*(5.38+1)+(2500/3000)*(5.78)= 5.88% Weighted Cost of Debt
  8. 8. WACC (Wd)(Rd)(1-Tax)+(We)(Re) = (20%)(5.88%)(1-0.4) + (80%)(11.20%) = 9.6656%
  9. 9. VALUATION OFWORLDWIDE PAPER COMPANY
  10. 10. Using project WACC of 9.665% NPV of Free Cash Flow $16,750,815 NPV>0 $750,815 Using firm hurdle rate of 15% NPV of Free Cash Flow $13,910,510 NPV>0 $(2,089,490)
  11. 11. (10,000,000) (8,000,000) (6,000,000) (4,000,000) (2,000,000) - 2,000,000 4,000,000 6,000,000 8,000,000 0% 5% 10% 15% 20% 25% 30% 35% NetPresentValue Discount Rate IRR = 11%
  12. 12. Conclusion Calculation for NPV is $750,815 IRR is greater than the project WACC If the other conditions are likely unchanged Yes, the longwood woodyard investment should be approved
  13. 13. GroupMembers Dung Le Connie Chen Guanhong Lin Niclas Gamaleya