In the case of Worldwide Paper Company we performed calculations to decide whether they should accept a new project or not. We calculated their net income and their cash flows for this project (See Table 1.6 and 1.5). We computed WPC’s weighted average cost of capital as 9.87%. We then used the cash flows to calculate the company’s NPV. We first calculated the NPV by using the 15% discount rate; by using that number we calculated a negative NPV of $2,162,760. We determined that the discount rate of 15% was out dated and insufficient. To calculate a more accurate NPV for the project, we decided to use the rate of 9.87% that we computed. Using this number we got the NPV of $577,069. With the NPV of $577,069 our conclusion is to accept this
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Using Tables 1.1-1.5 to generate a total of all cash flows (Table 1.6), we can then find WPC’s Net Present Value and the Internal Rate of Return for this particular project. Using WPC’s present hurdle rate of 15% we see that the project has a negative NPV of $2,162,760. Under this calculation the project would definitely be turned down. But, under the recently calculated hurdle rate of 9.87% the project would have a NPV of $577,069, and would be readily accepted by WPC. Also noted in Table 1.6 is the Internal Rate of Return for the project of 11%. We feel that the Net Present Value model is the superior decision making tool when evaluating this project because it correctly uses WPC’s cost of capital to discount the projects cash flows.
If there was uncertainty with some of the inputs for the project it would be easy to show what would happen if the inputs were adjusted in Tables 1.1-1.6. By changing the various inputs we could demonstrate different outcomes generated by the changing values. Regardless of the fluctuating input values we feel confident that the newly calculated Weighted Average Cost of Capital will determine the projects correct NPV. All of the inputs used will be very influential but we feel that sales revenues, operating costs, net working capital, and the discount rate are the most important. Sales in the shortwood market would be the major contributor to revenues of the new project and if the sales in that market go flat then the projected