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WORLDWIDE PAPER COMPANY

1. What is the investment that is under consideration? What are the sources of value (i.e., the benefits) of the investment under consideration? What are the associated costs for the investment?

2. Using a spreadsheet, itemize the cash flows over the life span of the investment (ignoring inflation as Prescott first did), i.e., for each year, itemize the following: capital outlays, incremental working capital (including the recovery of working capital. Hint: first identify the working capital every year, then identify the incremental working capital), incremental sales revenue and the associated costs (cost of goods sold, SG&A, depreciation, etc), incremental cost saving, after-tax salvage at end of project life. After identify all relevant cash flows, calculate the project cash flows for each year from the initial investment to end of project life.

3. Estimate the cost of capital for the project

4. Do an NPV and IRR analysis to evaluate the project using the cost of capital estimated in step 4.

5. Would employing the 15% hurdle rate according to WPC’s company policy change the decision of the investment? What do you think is more reasonable to use (the hurdle rate vs. the cost of capital estimated)?

6. Do you agree with Prescott that omission of the inflation impact would not critically affect the final decision of the project? Explain why?

7. Adjust the future cash flows factoring in inflation impact as expected by Prescott and reevaluate the project (using the spreadsheet in question 2). Does this change the decision on the investment?

8. Overall, if you were Prescott, what would be your recommendation on the investment under consideration? (Invest or do not invest?) Briefly stating why?