Worldwide Paper Case Study Incorporated in 2001, Worldwide Paper Company (WPC) is a corporation which is always focus on providing finest paper products to its clients and stakeholders. Headquartered in UAE, WPC’s most sales are distributed from the regions of Middle East, Asia, Africa and Levant.

As a global company nowadays, the area of operation of WPC includes paper trading-commodity and conventional grads, indenting and custom order-commodity and conventional grades, merchanting and stock and sale, art paper& board-matt and gloss, food board and folding box board, LWC, wood-free, uncoated and coated fine papers and boards, recycles, FSC, carbon neutral and eco-friendly papers, and technical papers. As the controller, Bob Prescott faced the problem that whether an additional new on-site longwood woodyard was worth investing.

The primary benefits this investment would bring is the elimination of the purchase of shortwood from an outside supplier and the creation of opportunity to sell shortwood in the open market. The new woodyard made the new technology available that it will be able to produce longwood while the old technology can only provide shortwood. Because the shortwood WPC needed was from Shenandoah Mill, a corporate owned by a competitor, the construction of new woodyard will benefit WPC much.

However, because of 18 million dollar’s investment, Prescott still need to consider whether the profit of this new woodyard is greater than its cost to make a decision. Analysis process Cash flow: In this case, 2008 is the first operating year, for 2008, the company expected to have revenues of approximately $4 million, the sales are expected to reach $10 million in 2009 and continue at the $10 million level through 2013.

The cost of goods sold would be 75% of revenues and SG&A (Selling, General and Administrative Expenses) would be 5% of revenues, the working capital in this case would equal 10% of incremental sales for the year, the incremental sales for 2008 is $4 million and for 2009 is $6 million. The terminal cash flow would be equal to the sum of net working capital and salvage value of the equipment . TABLE 1 shows the detailed steps in computing the cash flow of the project. WACC and IRR: (1) Based on the pre-share data, we know that shares outstanding are 500 millions, and recent market value per share is $24.

Therefore, the total equity is: 500million*$24=$12,000millions. The total debt is comprised of two parts. First part is bank loan payable and its rate is 5. 38%+1%=6. 38%. Second part is long-term debt and its rating is A, so its rate is 5. 78%. Total debt is:$2500millions+$500millions=$3000millions (2) Equity Proportion=E/D+E=$12,000millions/$3000millions+$12,000millions=$12,000millions/ $15,000millions=80% Debt proportion=D/D+E=$3000millions/$3000millions+$12,000millions=$3000/$15,000=20% (3) Since Re=Rf+? (Rm-Rf), we know Rm-Rf=historical average=6%, beta=1. 0, and rf=10-year old Government bonds rate=4. 6%, we can conclude: Re=4. 6%+1. 10*6%=4. 6%+6. 6%=11. 2% (4) We know the total debt is two parts, so we calculate Rd by weighting two parts’ return. Also we need to consider the 40% tax effect. And their long-term bond is rated A. Therefore, Rd=[$500millions/$3000millions*(5. 38%+1%)+$2500millions/$3000millions*5. 78%](1-40%)=0. 03528 (5) So WACC=(E/D+E)*Re+(D/D+E)*Rd(1-t)=80%*11. 2%+20%*0. 03528=9. 67% (6) As for IRR, based on the cash flow we have calculated: 0=($0. 48/1+IRR)+$3. 9/(1+IRR)^2+$4. 5/(I+IRR)^3+$4. /(I+IRR)^4+$4. 5/(I+IRR)^5+$4. 5/(I+IRR)^6+$2. 08/(I+IRR)^6 So IRR=11. 07% NPV: NPV=-16+0. 44+3. 24+3. 41+3. 11+2. 84+2. 59+1. 20=0. 83 IRR=11. 07%>Updated WACC, < old WACC PI= (0. 44+3. 24+3. 41+3. 11+2. 84+2. 59+1. 20)/16=1. 0518 World Wide Paper has used 15% as hurdle rate for 10 years, based on the risk-free rate of 10%. However in fact, the risk-free return is around 5%,so we should use update WACC to calculate NPV. From the graph we make, we can see the PV every year, and NPV is positive if we use update WACC to discount cash flow. IRR is also greater than updated WACC.

The detailed steps are displayed in TABLE 2 Conclusion: Judging from what we have discussed above, the company should invest this investment, since the NPV is positive and IRR is bigger than WACC. Therefore, this investment will increase OCF, save costs and improve efficiency. What is more, through this investment the company reduces the potential risk. They don’t need to purchase raw material from the Shenandoah Mill, owned by a competitor. And have a stable supply of raw materials? In conclusion, the company should invest this investment. Table 1 CASH FLOW 2008| 2009| 2010| 2011| 2012| 2013| Terminal cash flow| Revenue| $4. 00| 10. 00| 10. 00| 10. 00| 10. 00| 10. 00| | Minus COGS(75% of revenue)| $3. 00| 7. 50| 7. 50| 7. 50| 7. 50| 7. 50| | Minus SG&A(5% of revenue)| $0. 20| 0. 50| 0. 50| 0. 50| 0. 50| 0. 50| | Net Income| $0. 80| 2. 00| 2. 00| 2. 00| 2. 00| 2. 00| | Add operating savings| $2. 00| 3. 50| 3. 50| 3. 50| 3. 50| 3. 50| | Minus depreciation| $3. 00| 3. 00| 3. 00| 3. 00| 3. 00| 3. 00| | Taxable Income| $(0. 20)| 2. 50| 2. 50| 2. 50| 2. 50| 2. 50| | Minus Tax (40%)| $(0. 08)| 1. 00| 1. 00| 1. 00| 1. 00| 1. 0| | Income after tax| $(0. 12)| 1. 50| 1. 50| 1. 50| 1. 50| 1. 50| | Add depreciation| $3. 00| 3. 00| 3. 00| 3. 00| 3. 00| 3. 00| | Operation cash flow| $2. 88| 4. 50| 4. 50| 4. 50| 4. 50| 4. 50| | Minus Total cash flow of investment| $(2+0. 4)| (0. 60)| | | | | | Total cash flow of the project| $0. 48| 3. 90| 4. 50| 4. 50| 4. 50| 4. 50| 2. 08| Note: The total cash flow of investment in 2008 is the 2 million plus the change in working capital, which is 4? 10%=0. 40, The total cash flow of the investment in 2009 is just the change in working capital, which is (10-4)? 10%=0. 0 To calculate the terminal cash flow, add the Note: The total cash flow of investment in 2008 is the 2 million plus the change in working capital, which is 4? 10%=0. 40, The total cash flow of the investment in 2009 is just the change in working capital, which is (10-4)? 10%=0. 60 To calculate the terminal cash flow, add the salvage value of the equipment to the amount the business recovers in working capital by having and using the equipment. In this case, the terminal cash value equals 1. 8? (1- 40%)=1. 08 million plus the $1million net working capital for a total of $2. 8 million. of the equipment to the amount the business recovers in working capital by having and using the equipment. In this case, the terminal cash value equals 1. 8? (1- 40%)=1. 08 million plus the $1million net working capital for a total of $2. 08 million. Year| 2008| 2009| 2010| 2011| 2012| 2013| Terminal| Cash flow| 0. 48| 3. 90| 4. 50| 4. 50| 4. 50| 4. 50| 2. 08| Discount Rate| 1. 0967| 1. 2027| 1. 3190 | 1. 4466| 1. 5864| 1. 7399| 1. 7399| Present Value| 0. 44| 3. 24| 3. 41| 3. 11| 2. 84| 2. 59| 1. 20| Table 2