Case 18: Worldwide Paper Company
INDIVIDUAL QUESTIONS
Case Questions:
1.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 onsite 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.
2.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.
3.What is the net present value (NPV) and internal rate of return (IRR) for the investment?
...Case 19
1. WorldwidePaperCompany 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 the cash flows $18 million is not a small investment but in the long run 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.
2. The 15% discount rate to calculate NPV and the Cash Flows by using that discount rate ended up with a negative NPV of $ 2,137,217.21. That the discount rate of 15% was out dated and insufficient. The rate of 9.62% to compute and using this number to get the NPV of $746,981.31. I would recommend WorldwidePaperCompany to use the 9.62% discount rate, the returns will be great only if everything remains like expected So I would like to recommend them to evaluate themselves at least yearly as things may change from year to year.
3. The WACC of 9.7% yields an NPV for the project of $0.8 million and an IRR of 11.1%
Case 19
1. WorldwidePaperCompany has an opportunity to take on a new project. With this project...
...additional mutually exclusive projects, for Week’s four assignment, Team D will formulate answers to determine what between Project A and Project B each project’s payback period, netpresentvalue, and internal rate of return. In addition, the team will give an analysis of what caused the ranking conflict and which project should be accepted and why. With a final comment, the team will describe factors Caledonia must consider if they were doing a lease versus buy.
Cash flows associated with these projects
RRR = 11%
Year PROJECT A PROJECT B 11%
0 ($100,000) ($100,000)
1 32,000
2 32,000 0
3 32,000 0
4 32,000 0
5 32,000 $200,000
NPV $18,269 $18,690
Required rate of return on these projects is 11 percent
a. What is each project’s payback period?
Year Project A Project B PresentValue (PV) @ 11% Project A Project B
0 100,000 100,000 1 100000 100,000
1 32,000 0 0.90 28828 0
2 32,000 0 0.81 25971 0
3 32,000 0 0.73 23398 0
4 32,000 0 0.66 21079 0
5 32,000 200,000 0.59 18990 118690
Project a 100000/32,000=3.125 years
Project b 100,000/200,000=0.5 There was no cash flow for the first 4 years 4+0.5=4.5 years
Project A’s payback period is 3.125 years whereas Project B is 4.5 years.
b. What is each project’s netpresentvalue?
The NPV for Project A is $18,269, whereas the NPV...
...FIAT
CASE STUDY GROUP 6
Team members: Iñaki aizbitarte, Urko Ortega, Davide Rotta, Simone Zou, Pasquale Reitano
INTRODUCTION
The company that we have decided to consider for this analysis is the Italian factory Fiat spa. Fiat is a global group with a clear focus in the automobile sector. Through its various businesses, it designs, produces and sells automobiles and related components and production systems. Fiat was one of the founders of the European car industry and today, as a result of its partnership with Chrysler, has a manufacturing and commercial base of sufficient scale to compete as a global automaker.
The Fiat group after the entered in the American market with the acquisition of the quota of majority of Crysler is found again of forehead, over that to a new market, also to a new coin with all those that can be the risks over how commercial also those financial. Nevertheless, right now, the exchange rate between these two currencies is 1 euro =1.3118 dollars so in order to make easier the case we will use 1.31 to round it up.
The politics of the Group related to the management of the risk of change foresee, as a rule, the coverage of the future commercial flows that you/they will have bookkeeping demonstration within 12 months and of the orders acquired (or committed in progress) to put aside from their expiration. It is reasonable to believe that the relative effect of coverage suspended in the Reserve of cash flow hedge will...
...Netpresentvalue
In finance, the netpresentvalue (NPV) or netpresent worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the presentvalues (PVs) of the individual cash flows. In case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise longterm projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in presentvalue terms, once financing charges are met.
The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputting a price; the converse process in DCF analysis, taking as input a sequence of cash flows and a price and inferring as output a discount rate (the discount rate which would yield the given price as NPV) is called the yield, and is more widely used in bond trading.
Formula
Each cash inflow/outflow is discounted back to its presentvalue (PV). Then they are...
...
FINC5001 Capital Market and Corporate Finance

Workshop 5 – Capital Budgeting II
1. Basic Concepts Review
a) In applying NetPresentValue, what factors do we include, and what factors do we ignore?
Use cash flows not accounting income
Ignore
* sunk costs
* financing costs
Include
* opportunity costs
* side effects
* working capital
* taxation
* inflation
2. Practice Questions
a) After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated straightline over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $500,000. The firm believes that working capital at each date must be maintained at 10% of next year's forecasted sales. Production costs are estimated at $1.50 per trap and the traps will be sold for $4 each. (There are no marketing expenses.) Sales forecasts are given in the following table. The firm pays tax at 35% and the required return on the project is 12%. What is the NPV?

Figures in 000's  
Year  0  1  2  3  4  5 
Unit Sales   500  600  1,000  1,000  600 
Revenues   2,000  2,400  4,000  4,000  2,400 ...
...Examples Of NetPresentValue (NPV), ROI and
Payback Analysis
Introduction
Terms and Definitions
NetPresentValue  Method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.
Discount Rate  Also known as the hurdle rate or required rate of return, is the rate that a project must achieve in order to be accepted rather than rejected.
Return on Investment – Expected income divided by the amount originally invested
Payback Analysis – The number of years needed to recover the initial cash outlay.
Formulas
NetPresentValue = (t=1..n A * (1+r)t OR (t=1..n A/ (1+r)t
Where A = Cash flow
r = Required rate of return
t = year of cash flow
n = the nth year
Return On Investment = (Discounted Benefits – Discounted Costs) / Discounted Costs
Payback Period = Years taken to repay initial outlay .
Eg. Project Z Outlay = $ 4000
Yearly cash flows = $2000...
...accounting concepts
a) Business entity
b) Money measurement
c) Continuity
d) Cost
e) Accrual
f) Conservatism
g) Materiality
h) Consistency
i) Periodicity
Solution: FUNDAMENTAL CONCEPTS OF ACCOUNTING
Accounting is the language of business and it is used to communicate financial information. In order for that information to make sense, accounting is based on 12 fundamental concepts. These fundamental concepts then form the basis for all of the Generally Accepted Accounting Principles (GAAP). By using these concepts as the foundation, readers of financial statements and other accounting information do not need to make assumptions about what the numbers mean.
For instance, the difference between reading that a truck has a value of $9000 on the balance sheet and understanding what that $9000 represents is huge. Can you turn around and sell the truck for $9000? If you had to buy the truck today, would you pay $9000? Or, perhaps the original purchase price of the truck was $9000. All of these assumptions lead to very different evaluations of the worth of that asset and how it contributes to the company’s financial situation.
For this reason it is imperative to know and understand the eleven key concepts.
a)Business equitity:
When starting or expanding a business, many owners wonder if they should form a business entity and, if so, which one they should use. There is a wide variety of information and "pitches" being made on the...
...Critics to DCF methods
Ducht an UK companies
* However, it is found inappropriate to use DCF methods for investments that have got strategic implications.
* There are various reasons for the use of open approach. Since the outcomes of these projects are highly unforeseen, according one interviewee, the application of quantitative tools is not plausible. Therefore, companies tend to apply the rule of thumb methods rather than standardized quantitative models. The justification for not applying quantitative models is some times attributed to the nature of a project.
Capital inv appraisal of new technologies: Problems, misconceptions and research directions
* Specifically, it has been alleged that the traditional appraisal methods of payback,
discounted netpresentvalue (NPV) and internal rate of return (IRR) undervalues the longterm
benefits; that traditional financial appraisals assume a far too static view of future industrial
activity, underrating the effects and pace of technological change; that there are many benefits
from investments in new technology which are difficult to quantify and are often ignored in the
appraisal process; and lastly, it is claimed that the systems of management control often employed
by large organizations compound the bias against those investments which, although expensive,
reap rewards vital for longterm viability. The first issue is a...
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