Fort Green World Final

8/9/2019 Fort Green World Final

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Fort Green World


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CASE STUDY OVERVIEW

Fort Green World is the largest producer of paper and pulp

First plant in rural area of new England

Kurzer formed companys capital budgeting procedures todecide projects of more than $2!

E"isting mill at #ees oint! %orth &arolina

roduction to drop to ' tons with yearly cash flow of

$((!)22!*2

roject of new mill at +id,own (- miles away from #ees

point


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%ew mill in.estment $'(/0/ million with yearly &ash

flow of $(1!12/! +odernization mill in.estment (-)01 million with yearly

cash flow of $)!'*)!'/

ld projection of $ '(!/'*!('with .ariable cost of

$2'*034ton5e"isting6 +odernized plant to operate not more than (- years

%ew plant to affect employee moral and loyalty


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Questions


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Q1 :NPV of New Projects

+odernized mill7 8n.estment 9 $(-)!1!

8 9 (2: ;early cash flow after ta" deduction 9 $)!'*)!'/ 5for

2 years6

8ncremental cash flow9 $ )!'*)!'/< $ ((!)22!*2 9

$23!2(2!*' %=9 $ 63,500,076.15


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%ew +ill 8n.estment 9 $'(/!/!

8:9 (2:

;early cash flow after ta" deduction 9 $(1!12/! 5 for

2 years6

8ncremental cash flow 9$(1!12/! < $ ((!)22!*2 9 $3'!*-!'/

%= 9$ 100,549,850

Decision: NPV supports new mill proect wit! !i"!erpositi#e NPV.


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o%erni&e% ill NPV 'it! (ctu)l *)s! +lows 8n.estment 9 $(-)!1!

>e?uired rate of return 9 (2:

;early cash flow after ta" deduction 9 $)!'*)!'/ 5for 2

years6NPV $148,818,451.5

New ill NPV wit! (ctu)l *)s! +lows

8n.estment re?uired for the modernization 9 $'(/!/!

>e?uired rate of return 9 (2:

;early cash flow 9 $(1!12/!

NPV $185,868,---.8


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/ *)lcul)tion o t!e p))c perio% o e)c! in#estment:

P))c perio% o o%erni&)tion o eistin" mill :

8nitial in.estment 4 annual cash flows

9 *0/1 years

P))c perio% o new p)per mill:

8nitial in.estment 4 annual cash flows

9 -01)) years

o ,he in.estment made in the modernization of e"isting paper mill willbe reco.ered earlier then the in.estment in the new paper mill0


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Q&: NPV !n" IRR 'et(o"s

(/ NPV )n% 22 met!o%s "i#e t!e s)me )ccept

reect si"n)ls:

o%o

o%= accepts the in.estment in building a new paper mill

o 8>> method accepts the in.estment in the modernization

of the e"isting paper mill0


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8n mutually e"clusi.e projects! all projects ser.e the same purpose

@uch projects cannot be undertaAen simultaneously0

nly one project can be accepted and the others are to berejected0

,he cash flows of one project can actually be ad.ersely affected

by the acceptance of the other project0

,he in.estment scale of both projects is different

,he cash flow of building a new paper mill is $'1!3*!*2 more

than the cash flow of the modernization of e"isting paper mill0

/ NPV )n% 22 met!o%s c)n "i#e %i#er"ent si"n)ls

w!en e#)lu)tin" mutu)ll eclusi#e )ltern)ti#es:


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Q ): *ife of +o"erni,e"

+i-- 1. #e!rs

8n.estment 9 $(-)!1!

8:9 (2:

;early cash flow after ta" deduction 9 $)!'*)!'/ 5for

(- years6

%=9 $ 1--,057,300

22 -5.384


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Wit( Incre'ent!- C!s(

/-ows8ncremental cash flow9$ 23!2(2!*'

%=9 $ ))!2'(!)2-0*/

8>>9 (10((/:

8>> decreased by only (0(:

%= decreases by only $ (3!2*/!'-011

showing less effect of later cash flows then early cash flows

&hoosing modernization of paper mill

lower paybacA

Better 8>>

(- miles away only


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Continue"

E.aluation7

Ce wants to say that yearly cash flow is $)!'*)!'/

8t adds 2*!(1*!) to total yearly cash flows in - years

that is actually a large amount

thers consider 2 years a long period0

,he later cash flow add .ery low amount to %=

%ot ha.ing more affect on 8>> and not affecting

decision0


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Q. : Duestion -

8f we compare the 8>> still the modernized facility has a

better 8>> 5(/02(3:6 then %ew mill project 5()0-*(:6and a better paybacA0

,ime period if is (- years for modernized mill than also

8>> is (10((/:0

8t is only (- miles away0 Employee loyalty can be affected with new mill

construction due to higher distance0


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Q0 : IRR Wit( Incre'ent!- E2en"iture

(/:

22 13.-58 o increment)l epen%iture

o (*02-/: is the crosso.er rate of both the projects where there

%= 9 $(2'!*13!)10

o 8f we compare this rate to the re?uired return (2: we will accept theproject0

o 8f the cash flows ha.e been o.erestimated this may be causing the

result of 8>> to be (*02)/: that is only (02-: more than re?uired

return may be the actual cash flows are lower which may lower the

8>> to (2: or e.en lower than that that can actually maAe theproject unacceptable0


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3: IRR Ru-eo ,he decision rule for 8>> in case of mutually e"clusi.e

alternati.es! accept a project with 8>> greater than cost

of capital

o 8f both the projects ha.e 8>> greater than their cost of

capital! select the project ha.ing the highest 8>>0

o i.ergent signals by 8>> and %=

o For independent projects! 8>> and %= would ha.e

gi.en same answers0


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Q4 : D)t) reuire% or c)lcul)tin" t!e e)rl

c)s! low


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ncome st)tement or c)lcul)tion o t!e oper)tin"

c)s! low: o%erni&in" eistin"

)cilit

uil%in" new uil%in"

;)les

Price per ton numer o

tons no. o %)s in ) e)r/

)-- "(2 "*'9

$(3'!-'!

)-- "22 "*'9

$*'!*'!

$-)!/*2!/ $ (21!3/!


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Q5 : De2reci!tion o6er .

#e!rs7/or first fi6e #e!rs8

o%erni&)tion t!e ol% mill uil%in" ) new mill

;)les $(3'!-'! $*'!*'!


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/or net 1. #e!rs o%erni&)tion t!e ol% mill uil%in" ) new mill

;)les (3'-' *'*'

'2-'1/ (-/32


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Usin9 fin!nci!- c!-cu-!tor

c(!n9e in NPV?8 / o%erni&)tion t!e ol%

mill

uil%in" ) new mill

NPV %ep or -0 e)rs/ $ ()/!/(/!)-(0- $ (/-!/'/!2220/

NPV %ep or 5 e)rs/ $ (1!*2!1*02 $ 21(!/11!2230'

NPV c!)n"e $ 2(!-2!2-(01 $ /'!3!'0/

NPV c!)n"e ()0)-: )'0*2:


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NPV c(!n9e wit(

Incre'ent!- C!s( /-ows o%erni&e% mill New millNPV o proect wit! -0

e)r %epreci)tion

$ '*!-!1'0(-

$ (!-)3!/-

NPV o proect wit! 5e)r %epreci)tion

$ /-!2!*210/' $ (/'!--/!/-

22 o proect wit! -0

e)r %epreci)tion

(/02(3: ()0-*(:

22 o proect wit! 5

e)r %epreci)tion

2(0-22): (10)*'3:

*!)n"e in NPV $ 2(!-2!2-(01( $ /'!3!

*!)n"e in 22 *0**): 203-3:

NPV c!)n"e in **0/': /-0-):


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>E@%@

,he %= change would be higher in building a new mill ossible reasons would be the magnitude of early and

latter cash flows

#atter cash flows e"perience greater impact of discount

rate rather early cash flows - year depreciation maAes early cash flows higher0


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Q (ow -ow !nnu!-

2ro"uction c!n 9o0 ;early cash flow of modernized mill. >9 (2:

. n9 2

. =9 $(-)!1!

. +, 9 $ -0711047.-7

B0 ;early cash flow of new mill. >9 (2:

. n9 2

. =9 $'(/!/!

. +, 9 $ 8-,844,189.09


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o%erni&)tion o

eistin" mill

uil%in" New ill

@per)tin" c)s! low $ -0,711,047.-7 $ 8-,844,189.09

onn)"e per e)r 2*3!3)'0)1)-- '31(0(3

(%% V)ri)le *ost tonn)"e per e)r

#)ri)le cost per ton

$ '1'//30)1 $ (*/1'3/(0/

;)les $ (3(1-')-03 $ 211)(*3'*0'

inimum )nnu)l pro%uction


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Question 1;

@ame discount rate to e.aluate project wn cost

&ost of capital >isA5 higher for higher return6

Cigher discount rate 7 lower %=

E.ery projects 8>> should be compared with its own cost

of capital


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Q1; Continue"

ffect decision in - ecisions are affected if the 8>> are compared with each

projects cost of capital

,hus! it is actually better to use %= rue if 8>> is higher

of both projects

&hange of decision in ?uestion - of modernized mill

project


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,hanA ;ou

Fort Green World Final

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