Worldwide paper company

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Reference no: EM131624667

Worldwide Paper Company

Case Study Essay

Synopsis and Objectives

The case is based on an actual investment decision made by a major paper-products company in the 1990s. The numbers and the company name have been disguised at the request of the company. The dates have been revised for pedagogical reasons. The case provides a glimpse into the paper business, but is primarily designed to be a straightforward problem in assessing cash flows, cost of capital, and net present value of a capital-investment decision. The case works well for all audiences who are learning the basics of discounted cash flow and investment analysis. It is an excellent exercise in cash flows, discounted cash flow, and cost of capital. This is an individual assignment but you are welcome to use the Student Lounge to privately discuss your individual approach to the case. Of course questions are always welcome in Ask Questions.

The case touches on the following capital-investment topics:

  • Estimation of relevant cash flows (both cost savings and increased revenues)
  • The influence of taxes vis-à-vis cost savings and revenues
  • The change in net working capital as a cash flow
  • Component costs of capital as determined by current market conditions
  • The weighted average cost of capital (WACC) as the discount rate for the average investment

Format your essay as though you were preparing a formal analysis to present to the board of directors. Include an appropriate introduction, body, and conclusion. At a minimum, your analysis must address these 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.
  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.
  3. What is the net present value (NPV) and internal rate of return (IRR) for the investment?

Reference no: EM131624667

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