Worldwide Paper Company Case solution Company Background December 2013, Lucy Lang, the controller for the Blue Ridge Mill, was considering the addition of a new on-site longwood woodyard. The addition would have two primary benefits:to eliminate the need to purchase shortwood from an outsider supplier and create the opportunity to sell short.
EXECUTIVE SUMMARYWorldwide Paper Company Longwood Woodyard Proposal
Blue Ridge Mill is considering the addition of a new on-site longwood woodyard in 2006. This proposal is expected to gain two primary benefits during its 6 years economic life: to bring substantial cost saving by eliminating the need to buy shortwood from outside suppliers and produce its own shortwood to sell in open market. After executing detailed and sensitivity analysis, the project is expected to create value for shareholders at Worldwide Paper Company. The valuation method for the project is forecasting the future free cash flows generated from the project and calculating its net present value (NPV). This project has a positive NPV of $936,147, and an…show more content…
The estimated WACC, revenues and cost savings are essentially the key value drivers of the analysis. There are many drivers of WACC that impact NPV such as share price, beta, LIBOR, and credit rating. A 3% variation of WACC results in a negative NPV and an IRR lower than WACC, which means the investment will not create value for shareholders. Since there are a lot of different inputs and judgments involved and these values change regularly such as share price and beta, WACC is a key value driver that varies the most and impacts significantly on the valuation. Deviation of revenues and cost savings can also affect largely to the forecasted future cash flows. Sales might not be as high as $10 million in the 2nd year as the company enters as a new market competitor. Cost savings might have a variation of $500,000 from the original forecast. These variations can change to a negative NPV. A sensitivity analysis of WACC, sales and cost savings is included in the appendix to evaluate the value of the investment.
The company has the option of not executing the project but it will miss the opportunity of
This case is based on the actual investment decisions made by major paper products company, and is primarily designed for simple exercise in the assessment of cash flow, cost of capital, the net present value of capital investment decision. The case works well for all the spectators, who are learning the basics of discounted cash flow and investment analysis, including an assessment of the related cash flows (such as cost savings and increased revenue), the impact of taxes on savings and income, changes in net working capital as cash flow, and average cost of capital as the discount rate for the average investment. 'Hide
by Kenneth Eades Source: Darden School of Business 3 pages. Publication Date: January 31, 2002. Prod. #: UV2499-PDF-ENG