What are the yearly cash flows that are relevant for this investment decision? Complete the worksheet named CFs_Base Case in the Excel file Case_18 Worldwide Paper template.xls. Do not forget the effect of taxes and the initial investment amount.

What discount rate should Worldwide Paper Company (WPC) use to analyze those cash flows? Complete the worksheet named Cost of Capital in the Excel file Case_18 Worldwide Paper template.xls. Be prepared to justify your recommended rate and the assumptions that you used to estimate it.

What is the net present value (NPV) and internal rate of return (IRR) for the investment? How do you interpret these numbers?

What changes would you make to the base case numbers if an inflation rate of 2% is to be included in the cash flow projection? Complete the worksheet named CFs_Adjusted for Inflation in the same Excel file. Should the inflation effect have been considered as part of the base-case analysis?

Case 18. Worldwide Paper Company

Question:

Question)

What is the nature of the investment that is under consideration and what are the sources of value?

What are the yearly cash flows that are relevant for this investment decision? Complete the worksheet named CFs_Base Case in the Excel file Case_18 Worldwide Paper template.xls. Do not forget the effect of taxes and the initial investment amount.

What discount rate should Worldwide Paper Company (WPC) use to analyze those cash flows? Complete the worksheet named Cost of Capital in the Excel file Case_18 Worldwide Paper template.xls. Be prepared to justify your recommended rate and the assumptions that you used to estimate it.

What is the net present value (NPV) and internal rate of return (IRR) for the investment? How do you interpret these numbers?

What changes would you make to the base case numbers if an inflation rate of 2% is to be included in the cash flow projection? Complete the worksheet named CFs_Adjusted for Inflation in the same Excel file. Should the inflation effect have been considered as part of the base-case analysis?

Worldwide Paper Company In December 2006, Bob Prescott, the controller for the Blue Ridge Mill, was consid- ering the addition of a new on-site longwood woodyard. The addition would have two primary benefits:(1) eliminate the need to purchase shortwood from an outside sup- plier and (2) create the opportunity to sell shortwood on the open market as a new market for Worldwide Paper Company (WPC): Thus, the new woodyard would allow the Blue Ridge Mill not only to reduce its operating costs, but also to increase its rev y enues. The proposed woodyard utilized new technology that allowed tree-length logs called longwood, to be processed directly, whereas the current process required shortwood, which had to be purchased from a nearby mill. The Shenandoah Mill, which was owned by a competitor, had excess capacity that allowed it to produce more shortwood than needed for its own pulp production and to sell the excess pro- duction to several different mills, including the Blue Ridge Mill. Thus, adding the new longwood equipment would mean that Prescott would no longer need to use the Sbenandoah Mill as a shortwood supplier and that the Blue Ridge Mill would instead compete with the Shenandoah Mill by selling on the shortwood market. The question for Prescott was whether these expected benefits were enough to justify the $18-million capital outlay plus the incremental investment in working capital over the six-year life . of the investment. Construction would start within a few months, and the investment outlay woukd be spent over two calendar years: $16 million in 2007 and the remaining $2 million in 2008. When the new woodyard began operating in 2008, it would significantly reduce the operating costs of the mill. These operating savings would come mostly from the difference in the cost of producing shortwood on-site versus buying it on the open market, and were estimated to be $2.0 million for 2008 and $3.5 million per year thereafter. Prescott also planned on taking advantage of the excess production capacity by selling shortwood on the open market as soon as possible. For 2008, he expected to show revenues of approximately $4 million as the facility came on-line and began to break into the new market. He expected shortwood sales to reach $10 million in 2009 and continue at the $10-million level through 2013. Prescott estimated Worldwide Paper Company In December 2006, Bob Prescott, the controller for the Blue Ridge Mill, was consid- ering the addition of a new on-site longwood woodyard. The addition would have two primary benefits:(1) eliminate the need to purchase shortwood from an outside sup- plier and (2) create the opportunity to sell shortwood on the open market as a new market for Worldwide Paper Company (WPC): Thus, the new woodyard would allow the Blue Ridge Mill not only to reduce its operating costs, but also to increase its rev y enues. The proposed woodyard utilized new technology that allowed tree-length logs called longwood, to be processed directly, whereas the current process required shortwood, which had to be purchased from a nearby mill. The Shenandoah Mill, which was owned by a competitor, had excess capacity that allowed it to produce more shortwood than needed for its own pulp production and to sell the excess pro- duction to several different mills, including the Blue Ridge Mill. Thus, adding the new longwood equipment would mean that Prescott would no longer need to use the Sbenandoah Mill as a shortwood supplier and that the Blue Ridge Mill would instead compete with the Shenandoah Mill by selling on the shortwood market. The question for Prescott was whether these expected benefits were enough to justify the $18-million capital outlay plus the incremental investment in working capital over the six-year life . of the investment. Construction would start within a few months, and the investment outlay woukd be spent over two calendar years: $16 million in 2007 and the remaining $2 million in 2008. When the new woodyard began operating in 2008, it would significantly reduce the operating costs of the mill. These operating savings would come mostly from the difference in the cost of producing shortwood on-site versus buying it on the open market, and were estimated to be $2.0 million for 2008 and $3.5 million per year thereafter. Prescott also planned on taking advantage of the excess production capacity by selling shortwood on the open market as soon as possible. For 2008, he expected to show revenues of approximately $4 million as the facility came on-line and began to break into the new market. He expected shortwood sales to reach $10 million in 2009 and continue at the $10-million level through 2013. Prescott estimated