Net Working Capital

2016    2017    2018    2019    2020    2021    2022

Investment:
Capital Outlay 16000.00 2000.00 0.00 0.00 0.00 0.00 0.00
Net Working Capital (10% Sales) 0.00 400.00 614.00 14.00 15.00 15.00 15.00
Total Investment 16000.00 2400.00 614.00 14.00 15.00 15.00 15.00
Investment Recovery:
Equipment Salvage (1080.00)
Net Working Capital (full recovery) (1073.00)

Earnings before Interest and Taxes
(EBIT):
Sales Revenue 4000.00 10142.00 10285.00 10431.00 10578.00 10728.00

COGS (75% Sales) (3000.00) (7607.00) (7714.00) (7823.00) (7934.00) (8046.00)
SG&A (5% Sales) (200.00) (507.00) (514.00) (522.00) (529.00) (536.00)
Operating Savings 2000.00 3550.00 3600.00 3651.00 3702.00 3755.00
Depreciation ($18,000/6) (3000.00) (3000.00) (3000.00) (3000.00) (3000.00) (3000.00)
Total Costs & Expenses (4200.00) (7564.00) (7628.00) (7694.00) (7760.00) (7827.00)

EBIT (200.00) 2578.00 2657.00 2737.00 2818.00 2901.00

• Taxes (40%) 80.00 (1031.00) (1063.00) (1095.00) (1127.00) (1160.00)
  NOPAT (120.00) 1547.00 1594.00 1642.00 1691.00 1740.00
• Depreciation 3000.00 3000.00 3000.00 3000.00 3000.00 3000.00
• Investment (16000.00) (2400.00) (614.00) (14.00) (15.00) (15.00) 2138.00
  = Free Cash Flow (16000.00) 480.00 3933.00 4580.00 4627.00 4676.00 6878.00

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. Complete the table below using the detail summarized below:
   a. Investment:
   i. Initial Investment - $16M 2016, $2M 2017
   ii. Working Capital - 10% of Incremental Sales
   b. Operating Savings - $2M 2017, $3.5M 2018-2022
   c. Sales Revenue - $4M 20017, $10M 2018-2022
   d. Expenses - CGS – 75% of Revenue, SG&A - 5% of Revenue
   e. Salvage:
   i. Working Capital - recoverable at cost
   ii. Initial Investment - 10% or $1.8M before tax, $1.08M after taxes
   f. Depreciation – Straight Line over 6 years, no salvage, start in 2017
3. What discount rate should Worldwide Paper Company (WPC) use to analyze those cash flows? Explain 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? How do you interpret these numbers?
5. Propose two changes to the base case numbers presented in question 3 & 4. Explain the reasons for your changes and discuss the effect of those changes on the NPV and IRR.