Arauco Case

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Arauco Case

1. Should Arauco build the Nueva Aldea project? (Hint: Estimate the project Net Present Value and provide a recommendation considering quantitative and qualitative arguments)

Qualitative arguments

We would suggest the company to go ahead with the the project Nueva Aldea considering next arguments:

Horizontal expansion

The company Arauco should build the project Nueva Aldea, for various reasons related to production, efficiency, access to lower costs and its growth internationally.
Among the reasons that support the construction of the new plant, we consider that Arauco will be located in a specific region (VIII) close to the ports of Lirquén, Coronel and San Vicente where we can find the largest productive
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However, in the case of Arauco, forward integration presents at least five big threats:
1. Customers become supplier's competitors, as a consequence, decrease the pulp demand.
2. Cost disadvantage due to its smaller scale of paper manufacture operations compared to its paper manufacturers’ competitors.
3. To move the company out the boundaries of its core business into an adjacent space, where there is not a practical know-how developed.
4. Using recycled fibers from paper has several advantages, including lower cost to recycle paper than produce pulp.
5. Uncertainty about paper demand and price since computers, handle devices, and mobile phones would act as a substitute for paper.

Quantitative arguments

According to the estimated net present value of the investment in Nueva Aldea project, we would suggest the company to go ahead with the investment (The project Net Present Value estimations are shown in Exhibit 1).


* Evaluation time: 33 Years considering 3 years of construction, and 30 years of lifetime. * Price of Pulp (US$/Ton): The projection is that the price will increase 8% per year. * Level of Production (Ton/year): Assumed the data provided in the case for a new pulp mill. * Variable costs: Assumed from exhibit 6. It will increase the same 8% as the variable revenue. * Fixed Costs: 9% of annual sales. * Depreciation: Linear depreciation in 30
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