Case 18: Worldwide Paper Company
What are the yearly cash flows that are relevant for this investment decision? Do not forget the effect of taxes and the initial investment amount. (Submit an excel spreadsheet into D2L containing your computations.) Worldwide Paper Company (WPC) has an opportunity to take on a new project. With this project they would be considering an addition of a new on-site Longwood wood yard. The yearly cash flows for this investment seem to be very good if everything remained or exceeded the assumptions on which we calculated the cash flows. $18 million is not a small investment but in the long run we can see the company catching up to get back the invested money and also allowing them to make huge profits. The company is paying a 40% tax from their earning which is huge money but even after that, the company is making lots of profits.
What discount rate should Worldwide Paper Company (WPC) use to analyze those cash flows? Be prepared to justify your recommended rate and the assumptions that you used to estimate it. We first used the 15% discount rate to calculate NPV and the Cash Flows by using that discount rate we ended up with a negative NPV of $ (2,137,217.21). We determined that the discount rate of 15% was out dated and insufficient. Therefor to calculate a more accurate NPV for the project, we decided to use the rate of 9.62% that we computed. And using this number we got the NPV of $746,981.31. I would recommend Worldwide Paper Company (WPC) to use the 9.62% discount rate, but this is a good project and the returns will be great only if everything remains like expected. So, I would also recommend them to evaluate themselves at least yearly as things may change from year to year.
What is the net present value (NPV) and internal rate of return (IRR) for the investment?
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