# 1. Executive Summary

# 2. Calculating of WACC

## 2.1 Assumptions for calculations in the case:

l Plant life is 10 years (p.4)

l Salvage value of plant is 0 (p.4)

l Book value of plant at end of 1979 is 10.6 million (=12 million purchase price - 1.4 million working capital)

l Tax rate is 48% (calculated from Exhibit 7)

l For the period from 1980 to 1984: all data of sales, depreciation and manufacturing and other costs are given in the case (Exhibit 8)

l For the period from 1984 to 1989 we use the below assumption:

- Price growth rate is 8% (p.4)

- Power cost growth rate is 12% (p.4)

- Net working capital is always 9% of sales (Exhibit 8, current asset and liability items remain historical to sales)

- PPE and depreciation are based on historical data in 1980-1984 period (Exhibit 8)

- Capital investment are based on historical data in 1980-1984 period (Exhibit 8)

- Variable and fixed costs: we use 4-year average growth rates calculated based on Exhibit 8. So non-power variable cost growth rate is 11%, fixed cost growth rate is 6%, selling expenses growth rate is 7% and R&D expenses growth rate is at 5%

- To use this 4-year average growth rates, we assume that the scale of operations of this plant is constant so we need to adjust such cost growths to account for inflation. If the scale increases we should consider growths in costs on percentage of sale basis.

## 2.2 Cost of capital:

* a. Calculate beta β of sodium chlorate:*

The β of

We do not simply use the beta of

The average beta is calculated from the formula: β_{asset} = β_{equity} / [1+ (1-t)*D/E], where D is debt, E is equity and *t* is tax rate. To simplify the calculation, we assume that all these firms have tax rate at 48% and β_{debt} is zero. The detailed calculation is provided in the Appendix 1. From the table, we notice that the betas of 3 diversified chemical producers American Chemical, Kerr-McGee and Int. Minerals and Chemicals (Ga is a paper company and Pennwalt is a large diversified chemical producer) is less than the market beta (1.00). We also observe that the two pure play firms (last 2 rows) have higher beta than the market beta. Thus, sodium chlorate may have higher beta than other chemical products. Because sodium chlorate is totally new to

Now, _{levered equity} = β_{asset} * [1+ (1-t)*D/E] = 1.09*[1+(1-0.48) *0.35/0.65] = 1.40.

*b. Weighted average cost of capital (WACC):*

**Cost of equity**: in the case, the yield on Tbonds is 9.5% (p.4). We assume that it is the risk free rate. We use the historical equity risk premium 8.4% stated on the Table 9.2, page 247 of the textbook. According to the CAPM method, the cost of equity for this project is 9.5%+1.38*8.4% = 21.26%.

**Cost of debt**: because there is little information about

**WACC**: we use

# 3. Calculating NPV

To calculate the NPV for the project we have observed two cases during the investment: purchasing the plant without laminate technology and with laminate technology.

## 3.1 Without laminate technology

We have calculated NPV on the basis of the current cash flow provided in appendixes of the case and information provided in case material. So we have used the data in Exhibit 8 and projected cash flow from 1980 to 1984, and we have calculated cash flow to 1989 based on our assumptions aforesaid. For further details please refer to Appendix 2.

It had resulted on NPV being negative – 3,703 thousand USD.

## 3.2 With laminate technology

Case defines us some cost reductions and benefits such as graphite cost elimination, tax benefits and power cost savings, since 2,25 mln. USD worth of laminate technology is bought and installed. So we had calculated additional NPV, which has derived from cost savings and tax benefits we have out of buying the additional laminate technology. Our assumption is NPV with laminate technology = NPV without laminate + NPV additional savings.

From this approach we have calculated Additional NPV of 6,634 thousand USD in Appendix 3.

So NPV with laminate technology is -3,703+6,634=2,931 thousand USD.

# 4. Sensitive analysis

In order to see whether the project is viable in case of negative changes in variables, we have conducted sensitive analysis having one of major variables such as sales growth rate, which can be reflected by different reasons such as decrease in demand, production slowdown, economic recession and etc. We have tried other possible valuables, but they occasionally did not have much effect on the project outcomes.

We wanted to know what is the rate of growth rate should be in both cases (without and with laminate technology) so that the company will have Zero NPV. Using Solver function in Excel, we found that in case of Zero NPV without laminate technology sales growth rate should kept up around 14% and with laminated technology growth rate should not go down of around 2% level (Please see Appendix 4).

# 5. Strategic and economic benefits

Besides increasing shareholders wealth, company gets some strategic and economic benefits, such as:

- Increase in product range

- Larger market share in paper industry

- Opportunities to enter new market

- New market development and competition reduction

- Enhancement of relationships with current customers

- Development of new technology

By acquiring

Laminate technology would allow company to considerably cut power cost and completely eliminate graphite costs. By gaining technological savvy, the company can use the same practices in other plants and reduce production costs.

Company has developed the relationships with

The company is better off buying the plant than building from the scratch a new one. Usually, plants are costly to build. Also, the company can reduce competition in the market. Buying a plant would be the best entry strategy for company. Building a plant would take a year, and market is changing rapidly, so

Laminate technology makes the

# 6. Recommendations

Based on our analysis, we would like to make recommendations as follows:

Most fundamentally, a firm that is operating in the interests of its shareholders should try to accept all projects that increase the wealth of the shareholders. In case of

Based on our calculation, without the laminate addition, the NPV of Collinsville turns out to be negative (-3,703 thousand USD). Under this circumstance, we recommend not to invest in this project since it is against shareholders interests.

But at the same time new Laminate Technology would allow company to considerably cut power cost and completely eliminate graphite costs. Additional $2.25 mln. USD is needed to install this new technology. We consider this technology as a subproject attached to

## 141 comments:

hi, Pham Thi Thuy Ha

Could u emai me a copy of this report to me? coz I can not see the Appendix under NPV calculation.

Thanks a lot.

My email is urfriendgong@gmail.com

Dear THI, first of all thank you very much for your invaluable contribution.

I want to ask you (only if it is possible) if you could send me the appendix mentioned in the resolution of the case to my email address ccontador@elsauce.cl

best regards,

Hi there,

Could I also get a copy of the appendix? My email is sra1001@gmail.com

thanks,

Sam

wow, thank you so much for a job you have done. Could u email me a copy of the appendix? coz can not see this content properly. my email is moyang262@hotmail.com. Thanks a lot

Hi. Can i have a copy of Appendix?

Thanks alot.

my email is bedokeast@gmail.com.

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Hi,

can I get a copy of the Appendix

Thanks in advance

llleksah@hotmail.com

Could you please send me a copy of the appendix?

stockar@hotmail.com

Thank you

Nathan

hi,

could you please email me the appendix to dewolff_jan@yahoo.com

cheers,

Jan

could you please email me a copy of the appendix?

Thanks in advance.

Davidk456@gmail.com

Hi Miss Ha, Can I have the appendix also?

Here is my email address: hanhquyen214@yahoo.com.

Thanks so much!

Hola hola,

Gracias - thanks for this case.

Can u please send me the appendix of the NPV calculation ?

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THANKS!

Hi,

Could I also get a copy of the appendix ASAP? I would like to compare your results to my work. My email is tennisguy05@hotmail.com

thanks,

David S

Very nicely done. I too would like a copy of the appendix via email

budholly2001@yahoo.com

thanx

buddyclone

Nice analysis. Appendices are missing. Can you post appendices as well?

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I too would like a copy of the appendix via email please help me!!!!!

rexixtente@hotmail.com

thanx

Juanse3408

Could you please send me a copy of your appendices. Thanks

I forgot to leave my email. b-t-mccreary@sbcglobal.net. Thanks again!

Hi Pham,

Very nice analysis. I'm very interested to see Appendix.

Could you please e-mail me the appendix?

sundar_mr@yahoo.co.in

Thanks,

Sundar

Dear THI, first of all thank you very much for your invaluable contribution.

I want to ask you (only if it is possible) if you could send me the appendix mentioned in the resolution of the case to my email address aids9632001@hotmail.com

best regards,

Dear THI, first of all thank you very much for your invaluable contribution.

I want to ask you (only if it is possible) if you could send me the appendix mentioned in the resolution of the case to my email address jiwei1003@gmail.com

best regards,

Hello Thi-

I also do not see your appendix, cal you please email it to silversun430@gmail.com so I can get a better understanding of your work. I'd like to really understand your insight.

Thanks

Thank you for this case analysis, PHAM THI THUY HA. Could you e-mail me your spreadsheet with calculations, I'm a little stuck.

E-mail: scenicgrl@yahoo.com.

Thanks a million!

Love the solution. Can you send me the appendices please? Thank you so much.

jef.blazer84@gmail.com

Can you please send me your appendix excel sheet. I will be grateful. @ saffire1983@yahoo.com

Hi Pham,

Can you please email me a copy of your excel appendix so I can compare it to my own Thanks for posting your explanations! ;-)

My email is

sexyashleighstevens@yahoo.com

Hi Pham,

Wonderful explanation and nice of you that you share it with the public.

I am wondering if you could please send me a copy of Appendix at my email Khaledbodymaster@yahoo.com

You have my grateful

It's a great essay. Very helpful. I want to learn more about this case. Would you please email the appendix caculation to me? My address: 93307035@nccu.edu.tw

Thank you very much!

Great analysis! Please send me the appendix, too. My email is goshibumi@yahoo.com.

Hi,

Could you email me a copy of the Appendix and calculations? it would be a great help to me! My email is thehunted87@aol.com.

Thanks

hi, Thi, thanks for your job!

Could you email me a copy of the Appendix and calculations to paulluyao@hotmail.com ?

it will be a big help for me! thanks a lot.

can I get a copy of the Appendix

Thanks in advance

t.georgina@freemail.hu

Is it possible to get a copy for then appendix from you and more specific calculations. Your information is very helpful! If I could get it by tomorrow, that would be very helpful.

Thanks

BlondieRHS02@yahoo.com

I would also appreciate the appendix. Thank you.

pythonx1@msn.com

I would also appreciate the appendix. Thank you.

pythonx1@msn.com

Is it possible to get a copy for then appendix from you and more specific calculations. Your information is very helpful! If I could get it by tomorrow, that would be very helpful.

Thanks

Dear Sir,

I want appendix and other attachments for all calcuations please. Could you pl send this by today's mail for which act I will be very greatful to you.

thanking you

knvs subrahmanyam

my email id:smani.1967@gmail.com

Hi, could you send me a copy of the appendix with the resolution of the case? mi e-mail is r.sgher@gmail.com

thank you very much for your contribution

Could you please provide me with the appendix. email: arzu.tez@gmail.com

thanks Alot in advance

Hi Pham,

Would you still be able to send me the appendix? I am sure it'll help me to understand your work.

My email is yaybecca@gmail.com

Warmest Regards,

Rebecca

Hello Pham,

Nice Work. Could you please send me the appendix files to my email account: jay4406@yahoo.com

Thank you so much

Jason

hey can you please send me the forecast that you used to calculate the NPV for laminate and non laminate. thank you

xavier.raza@gmail.com

hi, Pham Thi Thuy Ha

It's kinda difficult to follow and see the details without the calculation part, could you please send me a copy of all the Appendix? Thanks a lot!My e-mail is zhuanjiaotuya@hotmail.com

hi, I'm confused on the NPV..do you mind emailing the spreadsheets to me? my email is stephanies184@gmail.com

Hi Pham Thi thuy Ha

Could you e-mail me a copy of this report to me?

Thankyou in advance.

My e-mail is hansanggyu@gmail.com

Hi Pham Thi THuy Ha. Could you please provide me with the appendix. email: dcerkoo@gwmail.gwu.edu

thanks Alot in advance

Can someone please send me the NPV calculations farooq.Ajmal@gmail.com

As with most of us it is due tomorrow.

Thank you.

Can someone please send me the calculations for this solution to jluvs454@gmail.com

Thanks so much

Hi PHAM THUY HA,

Many thanks for posting this solution.

Could you please send me the appendixes??

My mail is johnybubble@gmail.com

Cya, and thanks again.

Hi Pham Thi Thuy Ha,

Great Great job!!! I have added your webepage to my favorite. Would you pleas email me a copy of the Appendix today. I am trying to figure out what you did but seems that it'll be more helpful with the Appendix. Thank you so much

My email: jksara@gmail.com

Hi,

Could you please mail me the appendix. My mail ID is urvidharod@gmail.com.

thanks

Hi Pham Thi Thuy Ha,

Can I get a copy of the appendix for this case? I would like to double check my work for reference only. Thank you

my email is supergan312@gmail.com

Dear Pham Thuy Ha,

I was wondering if it is possible for you to send me the appendix which contained NPV mentioned in the resolution of the case to my email address akonrad12@gmail.com

With my best regards,

Anna

Fantastic work... Could you please send your calculations?

jthunder20@gmail.com

If any of you posting comments for that matter have the spreadsheets.. please send to jthunder20@gmail.com

Hi Pham Thi Thuy Ha, Can you send a copy of your excel for reference?

OR some in the list earlier pls forward a copy to pmongx_at_ gmail.com.

This is so helpful thanks so much but I was wondering if you could answer the following question: You posted

After-tax cost of debt is (1-0.48)*11.25% = 5.85%.

Where did (1-0.48) come from?

sorry my email is mayalee349@gmail.com Thanks!

PHAM THI THUY HA

AWESOME STUFF THANK YOU

can you send me your appendix and spreadsheets and offer some guidance regarding depreciation...

bmg2010@gmail.com

Hello Pham Thi Thuy Ha,

Thank you for a well presented analysis. Like many others who have commented would you be able to send me a copy of your NPV calculation so I can compare to my work.

Thanks In Advance!

jib2112@gmail.com

Hello,

This report looks very good. Could you email me a copy of appendix so that I can further review the calculations. arek2587@aim.com

Thank you.

Could you please email me the appendix to arek2587@aim.com

I want to ask you if you could send me the appendix mentioned in the resolution of the case to my email address csousa99@gmail.com

Hi Pham,

Thank you for your great analysis. Would you be able to send me your appendix by e-mail so I can compare my numbers with yours for the NPV calculations? My e-mail is curiousliz9@gmail.com.

Thank you in advance.

Hi Pham Thi Thuy Ha,

Good piece. Could you please send me (to email address below) your workings for this case study e.g. appendices and spreadsheets?

kings.roadie@gmail.com

thanks a lot for the info !! can u send me please the appendixes?? josekruz@hotmail.com

10x !=)

Hi PHAM ,

Thanks for posting the solution.

Could you please send me all the appendixes?

My mail is shay_ptv@hotmail.com

Thanks in advance,

Shai

This is really great!!! Thanks a lot. Would you please be so kind to send me appendixes and spreadsheets. My e-mail is velimirovic13@gmail.com.

Thanks in advance!

Hey... Nice work...

May I have access to the appendices of the solution jus for a study purpose... I'll be very thankful to you. My email id - rubyfriends2006@yahoo.co.in

Hi..

Can i have access to the excel solution for this case study. If possible kindly mail it to the following address:

urfriendsilky@gmail.com

Hi Pham Thi Thuy Ha

I admire your precision in your step by step breakdown of the case. Could you please email me a copy of the appendix and spreadsheets for my revision. It would be much appreciated.

Cheers

Sorry my email address is etobaiwa@yahoo.com for the appendix and spreadsheet details cheers

Hi, appreciate your work, can you send the appendix to elizabethyxz@gmail.com? Thank you.

any chance you can send a copy of the appendix to wgeorge322@gmail.com ? I'm getting different numbers than you and a slightly higher discount rate (used the betas in exhibit 5) and would like to compare. Thanks very much!

Very thorough analysis! Would you mind sending me your appendix (excel spreadsheet)? Many Many thanks!

claire730218@gmail.com

GREAT JOB!

I love your well executed answers which shows you've put a lot of time and consideration. This really helped me out to get a better understanding of the material. One favor though, could you please send me the appendix for the calculations to my email?

limhamngriffins@yahoo.se

Thank you so much!

Hey... Nice work...

May I have access to the appendixes of the solution and excel calculations ... my email is " parissny@yahoo.com"

Great Job can i also have a copy. You can send it to alimxd1@gmail.com. Thanks again.

Great job!

Can you please provide the appendix?

email is elo28115@gmail.com

Thanks.

Hi Thi

it is great job

could please email me the Appendix and the whole calculation ?

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Hi Thi

it is great job

could please email me the Appendix and the whole calculation AT mort_13@hotmail.com ?

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Hi Thi

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could please email me the Appendix and the whole calculation AT

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Hi Thi

it is great job

could please email me the Appendix and the whole calculation AT

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Great job, can I get a copy of the appendix, Thank you! send it to mannlarson@yahoo.com

Hi,

Good job!

Thank you for the detailed explanations. Can I have appendixes and your calculations as well. My address is todes7@gmail.com

Thank you!

Hi,

Thank you very much for this excellent case analysis. Would you be able to email me (fnce.help@gmail.com) a copy of your appendices? It will help me better understand where you got these numbers from.

Thanks!

hi:

Thanks for the answers!

Can you please send me the calculations that i can better understand the whole process of calculating the details?

Really appreciate for that!

My email is:

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Thanks for your great work. Could you also email me a copy of youe cals. uknoome@yahoo.com

Hi,

Much time has passed since you wrote this post.

But I desperately need the excel appendix.

Any1 can post please?

lan4ear at gmail dot com

Hello!

Thank you so much for this case analysis. It's really helpful!

But I don't understand some calculations. Can you send me an Appendix, please?

viktory_10.12.91@mail.ru

Thank you very much once again!

Can someone send me the calcualations on this case??? I know this is an older post but I'm having a hard time. This is a great article and it will help me a ton!! Thanks!

jwestgate57@gmail.com

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Thank you very much

Guys, can you also send me the appendix. arquivosbra@gmail.com

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Hi Thi,

Good job on this case and very helpful. Can you please send me the appendix's for this case?

matang1@nana.co.il

Thank you very much.

Hi,

I was wondering if you could email me a copy of your appendix? Thanks a ton! my email is khyetheng@gmail.com.

Unsure if you're still sending out appendicies.. but a copy to scotlandnz@hotmail.co.uk would be much appreciated

could u please send me a copy of your appendix? maligad@t-com.me

same here i would love a copy of the appendix to tzvika01@aol.com thank you

plase...could please email send me the Appendix

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Hi,

Excellent work; very didactic. Unfortunately I can't find the Appendix. Is is t possible to have this? My email is ayoulton@granasur.cl

Thanks, Andrew

Thank you so much for this case analysis. It's really helpful!

But I don't understand some calculations.

Can you send me an Appendix, please?

mazz8012@hotmail.com

Thank you so much for this case analysis. It's really helpful!

But I don't understand some calculations.

Can you send me an Appendix, please?

mazz8012@hotmail.com

I keep on getting NPV around negative 7000 when i made the my own excel following the assumptions. Would you please be so kind to send me your appendix?

revengecape@hotmail.com

Thank you so much in advance.

do you have the appendix? or anyone else? i'm confused with the calculations. scrauper

Can you send me you excel work please?

I have a final on it tomorrow.

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Thank you

Hi,

Excellent work; very didactic. Unfortunately I can't find the Appendix. Is it possible to have this? My email is ashkaf@walla.co.il

Thank you for your wonderful work!

Could you share the appendix or the calculation in excel with me? My email: abel32514@126.com

Such an outstanding work!!

PLEASE PLEASEPLEASEPLEASEPLEASEPLEASEPLEASEPLEASEPLEASEPLEASEPLEASE HELP HELP HELP HELP HELP HELP HELP HELP HELP HELP HELP HELP HELP HELP HELP HELP HELP HELP HELP HELP HELP

Could you send me the excel file you used?

email: jr.y@hotmail.com

Could you please send me the appendices as well! your work is SUPER helpful!

fallonmcneill@gmail.com

Can you send me the excel file you used please.

This is extremely helpful.

My email is jmann2174@gmail.com

its really nice.

could you sent me your appendix to peteraja@gmail.com

Hey, thanks so much for the great work. Could I also ask for the appendices. Would be tremendously helpful!!

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Thanks a lot in advance!!

Miranda

could you please send the appendices

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thanks

HiI,

I want to ask you (only if it is possible) if you could send me the appendix mentioned in the resolution of the case to my email address chen.wang1986@gmail.com

best regards,

HI,

Could you email me the appendix svp?

My email adress. wusilu_87@hotmail.com

Thank you so much in advance

May I kindly ask you for a copy, please

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thanks

Thank you for your answers. Would you send me an appendix? Email is guojin88@hotmail.com

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