Worldwide Paper Case

2050 Words Oct 11th, 2013 9 Pages
WORLDWIDE PAPER COMPANY

Blue Ridge Mill currently purchases shortwood from a nearby competing mill for pulp production. Bob Prescott, the controller for Blue Ridge Mill, is considering the addition of a new on-site longwood woodyard. The new woodyard would have two main benefits including the ability to eliminate the need to buy shortwood from an outside source and the opportunity to sell shortwood on the open market as a new market for Worldwide Paper Company. The new woodyard would allow Blue Ride Mill to decrease its operating costs as well as increase their revenues. We analyzed projections to see if the benefits of the new on-site longwood woodyard exceed the $18 million capital outlay plus the incremental
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Prescott and subtracted depreciation as an expense. We took depreciation of $3,000,000 each year, beginning in 2008 when the total investment had been spent, into account because it needed to be included when calculating taxes as depreciation is a deductible business expense. From here tax was calculated and subtracted at a rate of 40% based on our Earnings Before Interest and Taxes. Then, since depreciation is a non-cash expense and we are looking for cash flows, depreciation must be added back after taxes have been considered. This way we have a realistic view of the cash flows from the acquisition of this piece of equipment. Another item we included in our NPV calculation was the increase in net operating working capital. We included this because NOWC is a cash flow decrease as the higher levels of revenue requires higher levels of inventories and accounts receivable. It was estimated that NOWC would be equal to 10% of incremental sales revenue per year after full implementation. For the first year of implementation, 2008, the revenue was estimated to be $4,000,000. 10% of this would mean that NOWC would be $400,000. This means that since NOWC increased, cash flow decreased so we subtracted $400,000 for the 2008 expected cash flow estimate. Then, in 2009, revenues were expected to be $10,000,000 so revenues increased by $6,000,000. Since NOWC is 10% of incremental revenue, NOWC for 2009 would be $600,000. Again, this

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