WORLDWIDE PAPER COMPANY Harvard Case Solution & Analysis

WORLDWIDE PAPER COMPANY Case Solution

INTRODUCUTION

The case provides deep understanding and insight of capital budgeting process, this understanding is also very important in terms of resource allocation and when companies have limited investment funds, but number of profitable projects and the companies are normally cannot invest in all projects because of cash constraints. The most important step in capital budgeting project is to generate quantitative analysis and to create a premise for detailed investment appraisal. In this case, there are total 8 projects and investment appraisal of all these projects is needed, along with sensitivity analysis on the key variables that can change the end result of investment. This case demands the “four best” projects that the company should accept and make their investment.

There are some questions, which need to be answered and will help us to select best projects. The investment appraisal project is accompanied with detailed analysis, which is shown as below.

PROJECTS CAN BE RANKED BY SIMPLY INSPECTING THE CASHFLOWS?

Yes, they can be ranked by looking just at cash flows but this type inspection will not provide a conclusive view about investment or project under consideration. For example, if we look at project 4 and 5, both of these projects are generating cash flows over the period of 15 years. By looking at them, project 5 is showing higher excess of cash flow over initial investment. If someone will just inspect and rank projects by inspecting the cash flows, then this type of inspection will not provide any precise value of project relative to its initial outlay.

WHAT CRITERIA MIGHT YOU USE TO RANK THE PROJECTS, WHICH QUANTITIVE METHODS ARE BETTER AND WHY?

There are number of criterion, which can be used to rank projects under consideration like npv (net present value method), irr (internal rate of return), modified irr, simple or discounted payback, and profitability index. The methods that are considered reliable, best in investment appraisal and capital budgeting are Npv and Irr. These methods are considered best because they cover the whole life of the projects and associated cash flows such as conventional and unconventional cash flows unlike other methods, which only take into account the initial investment and end result. Furthermore, Npv incorporate all cash inflows and cash outflows of the project and then gives a net present value of the project after discounting using cost of capital or sometimes risk adjusted cost of capital because different projects have different risk characteristics. Npv is considered slightly better than others because it can also incorporate real options using Black Scholes and many other similar models to give accurate view of the investment to the investors.

On the other hand, Irr shows the return to investor on the initial outlay and helps investor to accept project, if and only if Irr is greater than the cost of capital..............

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