Worldwide Paper

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Worldwide Paper Company Longwood Woodyard Proposal

Blue Ridge Mill is considering the addition of a new on-site longwood woodyard in 2006. This proposal is expected to gain two primary benefits during its 6 years economic life: to bring substantial cost saving by eliminating the need to buy shortwood from outside suppliers and produce its own shortwood to sell in open market. After executing detailed and sensitivity analysis, the project is expected to create value for shareholders at Worldwide Paper Company. The valuation method for the project is forecasting the future free cash flows generated from the project and calculating its net present value (NPV). This project has a positive NPV of $936,147, and an internal rate of return (IRR) at 11.44% which is larger than the company’s weighted average cost of capital (WACC) at 9.85%. Consequently, the investment is expected to be able to maximize shareholders’ wealth by generating positive future cash flows.
The WACC of the company is estimated based on its cost of debt and cost of equity. After tax cost of debt is computed from the bank loan rates (LIBOR +1%) at 6.38% and 10-year-bond rate at A rating at 5.78%. Cost of equity is based of the 10-year US government bonds rate at 4.60%, historical average of market risk premium at 6.0% and beta at 1.1 because these data are considered most relevant to the company. Capital structure weights of the company is based on market value. Specifically, equity value is computed by taking the average price per share over the last year at $24/share. WACC is estimated at 9.85%.
Future cash flows are estimated with the assumption that revenues created by the investment by supplying shortwood start in 2008 at $4 million and $10 million per year from 2009 to 2013. Operating costs are at 80% of revenues. By taking inflation into consideration, sales increase…...

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