Worldwide Paper Company

Worldwide Paper Company

Background On December 2006, Bob Prescott, controller for the Blue Ridge Mill, was considering the addition of a new on-site longwood woodyard. This will bring two benefits: Eliminate purchase of shortwood from outside and the company will have the opportunity to sell shortwood to the open market. Also, this addition will reduce its operating costs and will increase it revenues. Shenandoah Mill manufactures the shortwood and it’s owned by the competitor. It has the capacity to have excess and sell it to different mills such as Blue Ridge Mill. Case information The new woodyard would begin operating in 2008 and the investment would be spent over two calendar years: $16 million in 2007 and the remaining $2 million in 2008. After 2008, when the woodyard began operating it would reduce the operating costs of the mill by the difference of the cost of producing shortwood on-site versus buying it on the open market. This is traduced to $2 million for 2008 and $3.5 million for 2009. Prescott also planned to sell the excess production capacity on the open market as soon as possible. Prescott estimated to have revenues of $4million in 2008 and $10 million per year for 2009 through 2013. The cost of goods sold is 75% of revenues and SG&A would be 5% of revenues. If the revenues increase, the inventories and accounts receivables would also increase. The Net Working Capital is 10% of annual revenues and at the end of life equipment, in 2013; the NWC will be recovered, whereas only 10% or $1.8 million of the capital investment would be recoverable. Taxes would be paid at a 40%, Straight-line depreciation (over the six-year life) with zero salvage value. Depreciation charges begin until 2008 after $18 million are spent. Because he don’t have a good feel of how inflation would affect his analysis, he decided not to include it. WPC had a company policy where corporate cost of capital is 15% to analyze investment opportunities since ten years ago. Prescott...