Worldwide Paper Company

Objectives

There are three objectives in this case study. The first objective is to estimate the current weighted average cost of capital (WACC). The second objective is to evaluate whether the expected benefits were enough to justify the capital outlay plus the incremental investment by using NPV method. The third objective is to make investment decision based on the estimated NPV.

Introduction

Bob Prescott was the controller for the Blue Ridge Mill. In December 2006, he was considering the addition of a new on-site longwood woodyard. The proposed woodyard utilized a new technology which allows tree-length logs, called longwood to be processed directly. The current process required shortwood where the shortwood had to be purchased from a nearby mill. For the time being, the needed shortwood was purchased from the Shenandoah Mill, which was owned by a competitor of Blue Ridge Mill. The Shenandoah Mill had excess capacity that allowed it to produce more shortwood than needed for its own pulp production. The excess production will be sell to several different mills where one of it is Blue Ridge Mill.

By adding a new on-site longwood woodyard, there will be two primary benefits. The first benefit is eliminate the need to purchase shortwood from an outside supplier. The second benefit is create the opportunity to sell shortwood on the open market as a new market for Worldwide Paper Company (WPC). Prescott would no longer need to use the Shenandoah Mill as a shortwood supplier. The Blue Ridge Mill would instead compete with the Shenandoah Mill in the shortwood market by selling the excess shortwood. Basically, the new woodyard would allow the Blue Ridge Mill to reduce its operating costs and increase its revenues. However, Prescott was wondering whether these expected benefits were enough to justify the capital outlay plus the incremental investment in working capital over the six-year life of the investment. The operating cost of the mill would be reduced...