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%.

General speaking, WACC is the rate that a company’s shareholders expect to be paid on average to finance its assets, and it is the overall required return on the firm as a whole. Therefore, company directors often use WACC to determine whether a financial decision is feasible or not. In this case, I will choose 9.38% as discount rate. The reason why I choose 9.38% as discount rate is because the estimated Debt/Equity is 26% under the assumptions by CFO Sheila Dowling, which is most close to 25% of Debt/Equity from the projected WACC schedule. There might be some flaws existing by using WACC as discount rate. As we know, the cost of debt would be raised significantly as the leverage increased. The investment will definitely increase the firm’s current debt. So, the cost of debt would not keep at 7.75%.

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,

This is estimated using the data given in case (Exhibit 1). Considering the tax rates of last ten

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:

Net Present Value (NPV) calculates the sum of discounted future cash flows and subtracting that amount with the initial investment of the project. If the NPV of a project results in a positive number, the project should be undertaken. It is the most widely used method of capital budgeting. While discount rate used in NPV is typically the organization’s WACC, higher risk projects would not be factored in into the calculation. In this case, higher discount rate should be used. An example of this is when the project to be undertaken happens to be an international project where the country risk is high. Therefore, NPV is usually used to determine if a project will add value to the company. Another disadvantage of NPV method is that it is fairly complex compared to the other methods discussed earlier.

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.

The valuation of NABR Publishing Ltd encompassed an extensive amount of exercise, and the valuation required taking into consideration various factors. The Discounted Cash Flow (DCF) method was used to value the NABR Firm. The DCF Method utilizes the net present value of future free cash flow projections and discounts the cash flow at a discount rate which was calculated using two of three options. In turn, this was done using the Weighted Average Cost of Capital (WACC). The motive for using WACC to get the discount rate is to

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

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)].