Worldwide Paper Company Case Write Up

As Pleasure Craft Inc. has publicly held debt; we determined the cost of debt to be the yield to maturity on the outstanding debt on the outboard motor project, so using a financial calculator we establish the YTM to be equal to 2.4827%. Because this is a Semi- annual compounding, rd = YTM * 2 = 4.9654%; for the cost of equity (Rf + β (Rm - Rf)): 12.8420%. The WACC is the discount rate of the projects WACC = rd * (1- Td) * D/V + (re * E/ V) = 4.9654% (1- 35%) * 30% + 12.8420% * 70% = 0.0996, so the WACC is determined to be 9.96% for outboard motors project. The NPV of this project is positive and equal to $35,630,973.63, the IRR for the outboard motors has calculated to be 8%. From these calculation we can know the project’s beta is lower than project front- end loader project and the risk is lower also; from the decision rule the NPV > 0 and IRR > R, so we choose the outboard motor project.

I used WACC as the discount factor, we expect the rate of return to be higher than it, the same at least. The WACC reflects the average risk and overall capital structure of the entire firm [2]. It’s the required return and it presents how much the company pays for the capital it finances. In this case, the cost of equity is 10.33%, the cost of debt is 6.50%. I calculated WACC using those numbers and got a result of 8.49%.

Since computed IRR for the Boeing is equal to 15.67%, the required rate of return has to be higher in order to have positive NPv. There are 3 possibilities that involves NPV. The first, NPV is higher than 0 and WACC is less than IRR, which means Boeing would gain more profits. This project scenario should pursue by the Boeing. Next is NPV is equal to 0, which means that there would be no gains and no losses from this project. Lastly, NPV is less than 0, which tells that Boeing would lose if they pursue this scenario. According to the table above, I compared Boeing with Lockheed Martin’s levered beta. My calculations are: . For the risk free rate, I have 4.56%. It is 30-year Treasury bond yield on June 2003. When Treasury bonds are in long term,

1- Basically we first have to find the incremental cash flows and then calculate the NPV. If the NPV is higher than zero; we are going to accept the Project. In order to find the cash flows we need to do the following steps:

The numbers above for the best and worst case scenarios are based off of the judgement. If the product were highly successful, then the combination of a high sales price, low production costs, and high unit sales would result in a very high NPV. However, if things turn out badly, then the NPV would be a negative. The project’s expected NPV is $12 million, the standard deviation is $11 million and the coefficient of variation is 0.88. Assume that Conch Republic’ average project has a coefficient of variation in the range of 0.3 - 0.6, so 0.88 indicates that this project is in high risk. Since the project is judged to have above-average risk, so a higher discount rate should be used to find its NPV. If Conch adds 3 percent to the corporate WACC

“Net present value (NPV) measures the value added to shareholder wealth from an investment Project” (Titman, Martin, Keown, 2011, p. 338). It is important for Caledonia Products to figure out the NPV. A start-up cost of $8, 100, 00 is a large amount, so Caledonia Products wants to ensure their investment will pay off. The first and second year covered the startup costs with an additional $7,061,600 profit. The return after year four starts to decline and probably would be negative after year five. NPV can help determine how long a company should continue a project, in Caledonia Products case, five years.

Students may be familiar with the classic NPV criterion. This case invites them to focus on the internal rate of return (IRR). If the IRR is greater than the project cost of capital, the 7E7 is a positive net present value project.1 A discussion of why this is true provides a solid “big picture” foundation for the case decision. The project IRRs are presented in case Exhibit 9. Therefore, the focus of student analysis should be on determining the benchmark against which to evaluate the IRRs. Thus, this part of the discussion helps to motivate the analysis of WACC. Some students may have voted in a manner that contradicts the IRR versus the cost of capital decision rule. This sets up the next question.

The project should be accepted since the net present value being positive. This means that the project will bring in some kind of value and money to the company, and also that it can have a progressive cash inflow throughout the time of the project. The company must not take on this project except it has an opportunity cost that displays that the company would take on an additional project that has a better NPV and value to the company.

This valuation of NABR was based on equity and debt resulting in the financial value of the firm, and connects with the value of the firm's asset. By using the DCF method, the total fair market value of the business entity is calculated by discounting future projected cash flows back to the date of valuation. At the end of the projection period, a residual or terminal value is calculated and discounted to its present value at the date of the valuation. The theory behind the discounted cash flow method is that an entity's value is equal to its present value of its expected future cash flow. This method is considered the most detailed analysis because it is thorough in nature and aids the owner to get a true picture of the firm value. This consists of certain steps which involve developing a method to be used to project future earnings of cash flow, a risk adjusted discount rate, discounting the projected cash flow to the date of the valuation, and capitalizing the terminal year's projection into a residual value using the discount rate less the growth rate. In this case, we estimated the growth rate of 2.3%, and the summation of the present values of the discounted cash flows and terminal value.

Calculate the effect that a revision of its cost of capital will have on the Lal Plr project’s NPV. Comment on the results.

In the event of a 12% cost of capital, the NPV equals -$4,644,841 much lower than the net present value at a weighted cost of capital of 6% and 10%.

For starters, we cite the fact that the existing corporate rate of 15% is simply outdated (ten years old) and the market for the cost of capital has changed significantly in recent years (e.g., 30-year treasury bonds currently yield 4.73% vs. 10% when existing corporate rate was calculated). Additionally, by calculating WACC, Mr. Prescott will have clarity with respect to how the market views the risk associated with the company’s assets and it will also help with calculating the required return for this and future capital budgeting projects. As for the latter, the required return is a critical data input and reference point that Mr. Prescott will need when calculating the net present value (NPV) of the project. Finally, when making capital budgeting decisions with NPV and internal rate of return (IRR) it is imperative that the business managers have knowledge with respect to the applicable discount rate and the data inputs/variables used to compute it. In this case, Mr. Prescott was lacking critical knowledge associated with the existing corporate cost of capital rate; therefore he lacked the confidence needed to apply it and in good conscious had to calculate a new WACC.

In early 2003, Michael, CFO of Aurora Textile Company, is deciding whether or not to install a new machine called Zinser 351 in order to save the declined sales and increase its competitive force. In deciding whether or not to invest Zinser 351, it is important to get the NPV and the payback period. To get the NPV and the payback period, we firstly need to forecast the future cash flows that the new machine will generate. We found the ten-year NPV to be $3,171,551 based on the FCFs that we forecast. Also, we use the payback period to analyze the acceptance of this project. We found that the discounted payback period is 5.69, which is less than the arbitrary cutoff point of 7.87. Based on our

c) The annual cash flow for the project to provide an NPV of $ 75000 when cash flow are discounted @ 20% is $ 415260.

Project S’ cash inflows sum up to a total of $140, 000. It is more than enough to recover the cost outlay [cash outflow or cost of the investment], maintain and deliver the 10% opportunity cost of capital, and still have [present value of] $19.985 [in thousands of dollars] available which belongs to the shareholders [shareholder’s wealth increased by $19.985 (in thousands of dollars)].