Because of its ability to produce a stronger and thicker strand lumber product than other mills,

Louisiana Pacific (LPX) decided to expand into a new market in 2022 - selling its version of

Oriented Strand Lumber (OSL) in a composite wood product form that it called Lamenated Strand Lumber (LSL). This structural product was superior in that LPX could offer a board with customizeable stiffnesses (1.3E, 1.5E, and 1.7E) and thicknesses (1-1/2" to 3-1/2"), with its primary applications being in the construction of moisture-resistant beams and headers in residential and commercial properties.

Application Value Proposition What Does This Mean?

Window & Door Header; Light-Duty Headers and Columns	LSL decreases labor costs and build cycle because you can use one piece instead of multiple pieces	Reducing build cycle lets builders turn land into cash more quickly
Wall Framing & Stair Stringers	LSL reduces waste and callback because it does not warp, twist, bow or shrink. It's also available in long lengths	Builders use this in Zone Framing. Mainly tall walls, kitchens and window walls. Less call backs and waste
Truss Chords	LSL can decrease a truss fabricator's costs by using smaller cross sections, using fewer plates (increasing production), and using fewer plies for girder trusses.	This ultimately means lower cost for the builder.
Roof Framing	LSL reduces waste and build cycle time when used as hip and ridge boards because it is straight, rectangular, and available in long lengths.	It is difficult to find long length, wide pieces of lumber I-joists have the length but they have had difficulty breaking into the roof rafter market due to the issues of connecting to an "I" section.

In order to meet a January 2022 full production schedule for LSL, LPX decided to refurbish an existing plant in Houlton, ME with capital expenditures and net working capital totaling $243 million. The primary fixed asset required for LSL production was a Dieffenbacher single opening steam injection press that would cost $229 million. In addition to the new press, LPX estimated that the refurbished mill would require a $14 million infusion of net working capital.

To learn more, please watch a brief video:

https://www.youtube.com/watch?v=NDczB5WffWY

The firm expects that 75% of the increase in net working capital will be returned at the project's termination. The capital equipment is to be depreciated using a 7-year Modified Accelerated Cost Recovery System (MACRS) schedule. LPX also concluded that the LSL expansion will exist for 7 years - thereby finishing in the fall of 2028.

As a result, LPX projected and has experienced the following Projected Sales Volumes:

Year 22 23 24 25 26 27 28

Original 3m 5m 6m 7m 7m 7m 7m

Price per unit $18 $18 $19 $19 $20 $20 ` $21 (m = million)

LPX also assumed that this project would end in 2028 with the $11,500,000 market sale of its press. In addition, the firm expected that the plant's total operating costs (both fixed and variable) would be 60% of sales in years 2022-2025 and 58% of sales in years 2026-2028.

Next, LPX's marginal tax rate is 31% (used deriving its Operating Cash Flows) and capital gains tax rate is 15% (used in deriving tax loss/gain in salvage value).

Last, you assume that LPX will raise all of the capital to finance this project using a blend of debt and equity, and intends to use a capital structure based on the following existing outstanding sources. As a result, you base your cost of capital assumptions on the following:

• The firm currently has 800 bonds outstanding with the following terms:
  • Remaining Maturity = 8 years, Coupon Rate = 5.40% (semiannual pay), Current Price = $990.
• The firm currently has 95,000 common shares outstanding with the following price and market terms:
  • Stock price = $28, Beta = 1.10; Rf Rate = 1%; ERm = 8% oThe firm currently has 43,000 preferred shares outstanding with the following terms:
  • Share price = $85; Dividend Rate = 4.15%

In order to evaluate this project, answer the following questions in deriving a cash flow analysis and recommendation.

1. What is the initial cash outlay (CF0) and what are the operating cash flows in years 1 thru 7 - adjusted for taxes and depreciation?