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WORLDWIDE PAPER COMPANY Case Solution & Answer

WORLDWIDE PAPER COMPANY Case Solution

In short, NPV is generally considered to be best one among all other methods for investment appraisal pur

The ranking is different using different quantitative methods such as payback period and profitability index methodology. The ranking also differs when payback period is used as compared to ranking through simple inspection of cash flows.

Different methods of ranking differ from each other, because different methods rank projects using different approaches such as when payback is used, it ranks project considering the years when project recovers initial investment. On the other hand, profitability index ranks the projects on the basis of cash flows and initial investment.

Furthermore, the use of NPV and IRR would also rank projects differently, NPV will rank projects according to their positive NPV and IRR will rank projects such as how higher is the IRR than cost of capital to discount projects cash flows.

 Exhibit 1

Ranking on the basis of excess cash flows over investment
Projects 2 3 4 5 6 7 8
Ranking through general inspection of cashflows 8th 1st 4th 2nd 7th 6th 3rd
Ranking using profitability index
Projects 2 3 4 5 6 7 8
Profitability index 1.08 5.00 1.78 2.10 1.10 1.28 2.08
Ranking 8th 1st 4th 2nd 7th 6th 3rd
Payback period
Projects 2 3 4 5 6 7 8
Payback period (years) 1.50 15.00 5.34 7.14 0.45 1.44 6.02
ranking 3rd 8th 4th 7th 1st 2nd 5th

DESCRIBE NATURE OF THE INVESTMENT UNDER CONSIDERATION.

The nature of the investment under consideration is quite capital intensive, especially in the start of project life where investment of $18 million would be spent over two calendar years. The investment may provide some returns in future, given that the new machine might bring down operating costs down. This investment will also help the company to operate independently without relying on other suppliers. The investment will also provide new market area to sold their products and in a new market area.

The nature of the investment is not much risky, because the company has sales support and also by applying new WACC, which is considerably lower than the ten years old WACC is giving positive NPV, which also reflects that project should be accepted. Apart from potential competition from Shenandoah Mills, the projects should be given a go ahead.

RELEVANT CASH FLOWS

There are number of relevant cash flows, which are included in the calculation of NPV. The impact on inflation over operating costs and revenue is not included, which should be added to reach a suitable conclusion. Furthermore, Prescott analysis of relevant cash flows is most likely based on experience, which is not certain. The dollar value can go adverse in future and can affect cash inflows and outflows significantly. Moreover, the inappropriate identification of relevant cash flows can change standard cash flows to unconventional pattern. It will in turn, affect the pay period of the project on both simple and discounted basis.

The depreciation is deducted before arriving at taxable profits because it is an accounting depreciation and then added back to reflect its affect during the life of project. The revenues are growing at constant rate of $10 million after 2009. It is included in the project appraisal, but it may not represent the actual results……………

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