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Case 18: Worldwide Paper Company Study Questions 1. What is

the investment that is under consideration? What are the potential sources of value (cost savings or revenue increases)? 2. Itemize the cash flows for each of the six years of the investment. 3. What are the components of the cost of capital and the weights used to compute Worldwide's WACC? 4. What are the NPV and IRR of the resulting cash flows? How do you interpret these numbers? 5. What changes would you make to these base case numbers? you may build on the example that was developed in another section of the class and is attached here. Answer the study questions (also attached)

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WORLDWIDE PAPER CO. taxrate 40% 2007 2008 2009 2010 2011 2012 2013 investment Outlay 16000 2000 Working capital 400 600 Recovery working capital 1000 initial outlay 1800 Operating cash flows Cost saavings 2000 3500 3500 3500 3500 3500 Sales increase 4000 10000 10000 10000 10000 10000 COGS @ 75% 3000 7500 7500 7500 7500 7500 SG&A @ 5% 200 500 500 500 500 500 Depreciation 3000 3000 3000 3000 3000 3000 Net operating profit BT -200 2500 2500 2500 2500 2500 Tax @ -80 1000 1000 1000 1000 1000 NOP AT -120 1500 1500 1500 1500 1500 Add back depreciation 3000 3000 3000 3000 3000 3000 After-tax cash flow 2880 4500 4500 4500 4500 4500 Investment -16000 -2400 -600 2080 Net cash flows -16000 480 3900 4500 4500 4500 6580 IRR 11.07% NPV 9% 1,046.12 Cost of debt (A rated) 5.78% After tax cost of debt 3.47% 3000 0.2 0.006936 Cost of equity (CAPM) Risk free (10-yr bond) 4.60% Market risk premium 5.60% Beta 1.1 Cost of equity (CAPM) 10.76% 12000 0.8 0.08608 15000 9.30%
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