WORLDWIDE PAPER COMPANY

Synopsis
The case is based on an actual investment decision made by a major paper-products
company in the 1990s. The numbers and the company name have been disguised at the request
of the company. The dates have been revised for pedagogical reasons. The case provides a
glimpse into the paper business but is primarily designed to present a straightforward problem in
assessing cash flows, cost of capital, and net present value of a capital-investment decision. The
case works well for all audiences who are learning the basics of discounted cash flow and
investment analysis. I have used it successfully with executives as an in-class exercise following
introductory classes on cash flows, discounted cash flow, and cost of capital. I encourage
participants to work in groups of two or three to bring together the concepts of the earlier classes
in this simple but comprehensive, capital-investment example.
The case touches on the following capital-investment topics:

Estimation of relevant cash flows (both cost savings and increased revenues)

Influence of taxes vis--vis cost savings and revenues

Change in net working capital as a cash flow

Component costs of capital as determined by current market conditions

Weighted average cost of capital (WACC) as the discount rate for the average investment

Suggested Questions
1. What is the nature of the investment that is under consideration, and what are the sources
of value (cost savings and revenue increases)?
2. What yearly cash flows are relevant for this investment decision? Do not forget the effect
of taxes and the initial investment amount.
3. What discount rate should Worldwide Paper Company (WPC) use to analyze those cash
flows? Be prepared to justify your recommended rate and the assumptions that you used
to estimate it.
4. What is the net present value (NPV) and internal rate of return (IRR) for the investment?