wpc powerpoint
TRANSCRIPT
Table of Content
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
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 equipment’s lifetime.
• $2 million for 2008
• $3.5 million per year
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
Case Question
Q: Should the Worldwide 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??
Weight of Debt and EquityWhat 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 * Market Value Per Share 500(million)*24 = 12.000 Billion
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• Prescott used an outdated figure to calculate the discount rate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
WACC
(Wd)(Rd)(1-Tax)+(We)(Re)
= (20%)(5.88%)(1-0.4) + (80%)(11.20%)
= 9.6656%
VALUATION OF WORLDWIDE PAPER COMPANY
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)
(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%
Net
Pre
sen
t V
alu
e
Discount Rate
IRR = 11%
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
Gr
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Dung Le
Connie Chen
Guanhong Lin
Niclas Gamaleya