CASE 18:WORLDWIDE PAPER COMPANYTeam 3:Adrian PogodaDivya MishraDragan PetreskiHanish PahwaYuchuan Jin<br />Capital Budgeti...
AGENDA<br /><ul><li>Introduction/Background
Swot Analysis
Problem Identification
Data analysis
Recommendation</li></ul>2<br />
BACKGROUND<br /><ul><li>In December 2006,Bob Prescott, the controller for the Blue Ridge Mill, was considering the additio...
NEW WOODYARD<br />4<br />
CURRENT PROCESS<br /><ul><li>Blue Ridge Mill purchases shortwood from the Shenandoah Mill
The Shenandoah mill is owned by a competitor</li></ul>5<br />
PRIMARY BENEFITS OF NEW WOODYARD<br /><ul><li>Eliminates the need to purchase shortwood from an outside supplier (Shenando...
Creates the opportunity to sell shortwood on the open market as a new market
Reducesoperating cost and increases revenue</li></ul>6<br />
New Woodyard Excess Capacity<br />Shortwood<br />for pulp production<br />Sell shortwood in open market<br />PRIMARY BENEF...
SWOT ANALYSIS<br />8<br />
CASE INFORMATION<br /><ul><li>The new woodyard would begin operating in 2008
Investment ($18 million)outlaywould be spent over two calendar years:</li></ul>9<br />
<ul><li>Operating savings :</li></ul>(Buying shortwood) – (Cost of producing shortwood)<br />CASE INFORMATION<br />10<br />
<ul><li>Expected revenues ($ million) by selling shortwood on open market :</li></ul>CASE INFORMATION<br />11<br />
<ul><li>Cost of Capital = 75% of revenue
SG&A = 5% of revenue
Tax rate = 40%
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Worldwide paper company (Case Study)

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Transcript of "Worldwide paper company (Case Study)"

  1. 1. CASE 18:WORLDWIDE PAPER COMPANYTeam 3:Adrian PogodaDivya MishraDragan PetreskiHanish PahwaYuchuan Jin<br />Capital Budgeting & Resource Allocation<br />1<br />Dated : 04/20/2011<br />
  2. 2. AGENDA<br /><ul><li>Introduction/Background
  3. 3. Swot Analysis
  4. 4. Problem Identification
  5. 5. Data analysis
  6. 6. Recommendation</li></ul>2<br />
  7. 7. BACKGROUND<br /><ul><li>In December 2006,Bob Prescott, the controller for the Blue Ridge Mill, was considering the addition of a new on-site longwood woodyard</li></ul>3<br />
  8. 8. NEW WOODYARD<br />4<br />
  9. 9. CURRENT PROCESS<br /><ul><li>Blue Ridge Mill purchases shortwood from the Shenandoah Mill
  10. 10. The Shenandoah mill is owned by a competitor</li></ul>5<br />
  11. 11. PRIMARY BENEFITS OF NEW WOODYARD<br /><ul><li>Eliminates the need to purchase shortwood from an outside supplier (Shenandoah Mill)
  12. 12. Creates the opportunity to sell shortwood on the open market as a new market
  13. 13. Reducesoperating cost and increases revenue</li></ul>6<br />
  14. 14. New Woodyard Excess Capacity<br />Shortwood<br />for pulp production<br />Sell shortwood in open market<br />PRIMARY BENEFITS OF NEW WOODYARD<br />7<br />
  15. 15. SWOT ANALYSIS<br />8<br />
  16. 16. CASE INFORMATION<br /><ul><li>The new woodyard would begin operating in 2008
  17. 17. Investment ($18 million)outlaywould be spent over two calendar years:</li></ul>9<br />
  18. 18. <ul><li>Operating savings :</li></ul>(Buying shortwood) – (Cost of producing shortwood)<br />CASE INFORMATION<br />10<br />
  19. 19. <ul><li>Expected revenues ($ million) by selling shortwood on open market :</li></ul>CASE INFORMATION<br />11<br />
  20. 20. <ul><li>Cost of Capital = 75% of revenue
  21. 21. SG&A = 5% of revenue
  22. 22. Tax rate = 40%
  23. 23. Straight-line depreciation ( over the six year life) with zero salvage value
  24. 24. Net Working capital = 10% annual revenue
  25. 25. Depreciation charges begin after the total $18 million outlay and machinery starts the service</li></ul>CASE INFORMATION<br />12<br />
  26. 26. PROBLEM IDENTIFICATION<br />What will the current WACC be?<br />Whether the expected benefits were enough to justify the $18million capital outlay plus the incremental investment in working capital over the six-year life of the investment?<br />13<br />
  27. 27. FLOW CHART<br />Calculate WACC<br />1)<br />Calculate NPV, IRR, PI, MIRR<br />2)<br />Final Decision<br />3)<br />14<br />
  28. 28. <ul><li>Cash Flow </li></ul>DATA ANALYSIS- CASH FLOW<br />15<br />
  29. 29. DATA ANALYSIS- OUTDATED WACC<br /><ul><li>WACC = 15%
  30. 30. WPC has a company policy to use its corporate Cost of Capital to analyze investment opportunities
  31. 31. WPC has not changed its WACC in 10 years
  32. 32. NPV = ($2.14) (Negative)
  33. 33. View Worldwide Paper Company.xls here</li></ul>16<br />
  34. 34. DATA ANALYSIS-UPDATED WACC<br /><ul><li>Current WACC (US department of Treasure)</li></ul>17<br />
  35. 35. PAST 30 YEARS<br />18<br />
  36. 36. Current WACC = 9.67%<br />NPV = $0.72 million<br />IRR =10.88% <br />PI= 1.045<br />MIRR = 10.36%<br />19<br />DATA ANALYSIS-UPDATED WACC<br />EXCEL HAS MAGIC <br />Worldwide Paper Company-1.xlsx<br />
  37. 37. RECOMMENDATION<br />20<br />
  38. 38. RECOMMENDATION<br /><ul><li>Decision:</li></ul>The expected benefits are enough to justify the $18million capital outlay plus the incremental investment in working capital over the six-year life of the investment<br />“Invest in the new longwood Woodyard”<br />21<br />
  39. 39. QUESTIONS<br />22<br />THANK YOU <br />

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