Worldwide Paper

It must be 2-3 pages including the excel spreadsheet. I’m attaching the reading along with it. Thank you
Case 18: Worldwide Paper

  1. What is the nature of the investment that is under consideration, and what are the sources of value (cost savings and revenue increases)?
  2. What yearly cash flows are relevant for this investment decision? Do not forget the effect of taxes and the initial investment amount. Complete the table below using the detail summarized below:
    1. Investment:
      1. Initial Investment – $16M 2016, $2M 2017
      2. Working Capital – 10% of Incremental Sales
    2. Operating Savings – $2M 2017, $3.5M 2018-2022
    3. Sales Revenue – $4M 20017, $10M 2018-2022
    4. Expenses – CGS – 75% of Revenue, SG&A – 5% of Revenue
    5. Salvage:
      1. Working Capital – recoverable at cost
      2. Initial Investment – 10% or $1.8M before tax, $1.08M after taxes
    6. Depreciation – Straight Line over 6 years, no salvage, start in 2017
  2016 2017 2018 2019 2020 2021 2022
Capital Outlay
Net Working Capital (10% Sales)
Total Investment
Investment Recovery:
Equipment Salvage
Net Working Capital (full recovery)
Earnings before Interest and Taxes (EBIT):
Sales Revenue
Cost of Goods Sold (75% Sales)
SG&A (5% Sales)
Operating Savings
Depreciation ($18,000/6)
Total Costs & Expenses
– Taxes (40%)
+ Depreciation
– Investment
= Free Cash Flow
  1. What discount rate should Worldwide Paper Company (WPC) use to analyze those cash flows? Explain your recommended rate and the assumptions that you used to estimate it.
  2. What is the net present value (NPV) and internal rate of return (IRR) for the investment? How do you interpret these numbers?
  3. Propose two changes to the base case numbers presented in question 3 & 4. Explain the reasons for your changes and discuss the effect of those changes on the NPV and IRR.