DATA ANALYSIS

CASE INFORMATION

The new woodyard would begin operating in 2008

Investment ($18 million) outlay would be spent over two calendar years:

2007

2008

$2 million

$16 million

Operating saving:
(buying shortwood) ( cost of producing shortwood)
2007

Future

$2 million

$3.7 million

Expected revenue by selling shorwood in open market :

2008

2009

2010

2011

2011

2012

$4
million

$10
million

$10
million

$10
million

$10
million

$10
million

Cost of Good Sales : 75% revenue

Selling General & Administration : 5% revenue

Tax : 40%

Depreciation based on straight line method for 6 years, without salvage value.

NOWC = Net Operating Working Capital : 10% annual revenue

PROBLEM INDENTIFICATION
1. What will the current WACC be?
2. Whether the 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?
DATA ANALYSIS
1. Calculate weighted average cost of capital (WACC).
2. Calculate Net present value (NPV), Internal rate of return (IRR), Modified internal
rate of return (MIRR).
3. Final decision.

DATA ANALYSIS :

CASH FLOW

Based on calculation above, found positive valuable cash flow from t=1= t 2008 until t=6= t
2013 except on t=0 = t 2007. Capital investment is in year 2007 and 2008. In cash
flow terminal, NOWC had can be reacquired.

CASH FLOW INFORMATION

1. Net working capital = 10% of sale x $10,000,000

2. Salvage value x (1-tax rate) = $ 1,800,000 x (1-40%)
3. Increase in net working capital in 2008 is recoverable.
$400,000 net working capital in 2008 will be recovered
4. Cost of good sold = 75% of revenue =75% x & 10,000,000
5. SG&A = 5% of revenue =75% x & 10,000,000
6. Depreciation = equipment value/6 years = $18millions
7. Total cost = COGS + SG&A + Operating saving + Depreciation
=$7500,000 + $500,000 + $3500,000 + $3000,000
8. EBIT = sales Total expenses = $10,000,000 - $7500,000
9. Tax Expenses = 40% EBIT = 40% $2500,000
10. Net Income = EBIT Tax = $2500,000 - $1000,000
11. Operating CF = Net Income + Depreciation = $1,500,000 + $3,000,000
12. Change in Net Working capital = Net Working Capital of year 2 year 1
FCF = Operating CF Capital outlay Change in Net Working Capital + Capital
Investment Recoverable + Recoverable NWC
For (2008) = $2800,000 - $2000,000 - $400,000
For (2013) = $4500,000 + $1080,000 + $1000,000
13. NPV of FCF = NPV of FCF from 2008 & 2013
14. NPV > 0 = FCF of 2007 + NPV of FCF of 2007 = $16,000,000 + $16,750,815

DATA ANALYSIS: WEIGHTED AVERAGE COST OF CAPITAL (WACC).

WACC is a firm calculation of cost for capital whereby every sources of capital truly
according to rate how many the capital contribute to firm. In Worldwide Paper Company case

(WPC), firm capital come from equity and debt which measures heavy cost this capital with
rightly. WACC that high shows that the company spend sum that is fairly large to increase
capital, which means that company can become risky. On the other hand, WACC that low
show that the company gain lower capital. Following is WACC calculation to WPC case
DATA ANALYSIS: OUTDATED WACC
Worldwide Paper Company has a company policy to use the corporate cost of capital
(WACC) to analyse investment opportunities. WACC is 15%. Worldwide Paper Company
also has not change its WACC in 10 years.
NPV = ( $2,089,490) ( Negative )
NPV < 0
Investment = Loss
DATA ANALYSIS: UPDATED WACC

Component of equity
Bank loan payable

500

(+) Long-term debt

2500

Total debt

3000

Component of equity
Shares outstanding

500

(x) Current market price

24

Total equity

1200

% of cost debt (wd)

3000/15000
= 0.2

Cost of debt

5.78%

% of cost of equity (we)

12000/15000 = 0.8

Cost of equity
= rfr + b (rpm)

4.6% + 1.1% (6%)

= 11.2%

Beta

1.10%

Market premium

6%

Risk free rate

4.6%

Tax rate

40%

WACC = % debt x cost of debt (1- tax) +

% equity x cost of equity
WACC = wd rd ( 1- T ) + wp rp + wc rs
WACC = 5.78 x 0.20 ( 1- 0.40 ) + 11.2 x 0.80 = 9.6536 %
Using the updated WACC , so WACC firm is 9.6536, with most from weight that came from
common equity. WACC that produced as sensitive to minor changes in estimate.
misrepresentation capital structure during company or any change in future capital structure
and need to be closely monitored.

DATA ANALYSIS: NET PRESENT VALUE

Net present value is the difference between the present value of cash inflows and the present
value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a
projected investment or project.
Method : Calculation of NPV

NPV = FCF/(1+r)^t
CF = Cash Flow
r = Rate Of Return
t = Time/Years
This following is the calculation of NPV for the case of Worldwide Paper Company:
WACC = r = 9.6536 %
YEAR

FCF

PV of CF

t=0, 2007

(16,000,000.00)

(16,000,000.00)

t=1, 2008

480,000.00

437,742.13

t=2, 2009

3,900,000.00

3,243,536.71

t=3, 2010

4,500,000.00

3,413,059.27

t=4, 2011

4,500,000.00

3,112,582.96

For Blue
Ridge Mill
t=6, 2013
$
6,580,000.00
$
3,785,197.35
they has
Net Present Value (NPV):
$
830,678.18
two
choices,
namely whether to produce itself "shortwood-site" or purchased at open market. Based on
calculation that has been made, Prescott choose to produce "shorwood-site" itself.
t=5, 2012

4,500,000.00

2,838,559.76

DECISION
To determine whether this project could be accepted or rejected is by comparing IRR
value with WACC or NPV. If larger IRR value from WACC value and larger NPV value from
0, so the project acceptable and if on the other hand the project need rejected.
Based on analysis on-side longwood woodyard project, NPV = $830,678.13,
NPV value is more than zero. By the rule, investment for the on-side longwood
woodyard project should continue after regard benefit return that is good from capital
outflow as much as $18 million. Expected benefits are enough to justify the $18 million
capital outlay plus the incremental investment in working capital over the six year life of the

investment. So the Worldwide Paper Company should invest in the new longwood
woodyard.