PLYWOOD PRESSESThe plywood division is an important component of the firm’s business and nearly two entire plants are devoted to the production of plywood panels In brief the production process involv

(a)

Nakoi Dakota Initial Investment $750,000 $1,300,000 Output per day (square feet) 6,000 7,000 Days used each year 240 240 Market price per square foot of plywood $1.80 $1.80 Raw materials (% of sales) 72% 72% Annual labour cost $276,000 $226,000 Annual maintenance cost $52,000 $60,000 Annual overhead (cash) $78,000 $60,000 Year 7 after-tax market value $75,000 $390,000

Calculation of Annual Cash Flows: Year 0 1 2 3 4 5 6 7 Nakoi Initial Investment -$750,000 Dakota Initial Investment -$1,300,000 Revenue $0 $1,555,200 $1,620,288 $1,686,118 $1,752,703 $1,820,057 $1,888,194 $1,957,129 Cash Costs $0 $1,118,400 $1,164,736 $1,211,475 $1,258,625 $1,306,194 $1,354,191 $1,402,624 Depreciation $0 $107,143 $107,143 $107,143 $107,143 $107,143 $107,143 $107,143 Labor Costs $0 $276,000 $276,000 $276,000 $276,000 $276,000 $276,000 $276,000 Maintenance Costs $0 $52,000 $52,000 $52,000 $52,000 $52,000 $52,000 $52,000 Overhead Costs $0 $78,000 $78,000 $78,000 $78,000 $78,000 $78,000 $78,000 Taxable Income $0 $23,657 $44,409 $64,621 $84,321 $103,538 $122,296 $140,616 Taxes $0 -$9,463 -$17,764 -$25,848 -$33,729 -$41,423 -$48,944 -$56,307 After-tax Cash Flow -$750,000 $14,194 $26,646 $38,773 $48,789 $58,372 $67,503 $76,309

Calculation of Net Present Value (NPV) and Internal Rate of Return (IRR): Nakoi Dakota NPV (4%) -$1,019,327 -$1,222,016 IRR 14.02% 15.85%

(b)

Nakoi Dakota Selling Price and Cash Costs Grow at 3% NPV (17%) -$1,122,580 -$1,344,024 IRR 12.30% 13.82%

Selling Price and Cash Costs Grow at 4% (same as in part a) NPV (17%) -$1,019,327 -$1,222,016 IRR 14.02% 15.85%

Selling Price and Cash Costs Grow at 5% NPV (17%) -$930,289 -$1,112,062 IRR 16.12% 18.15%

(c)

Nakoi Dakota Selling Price Grows at 3%, Cash Costs Grow at 4% NPV (17%) -$1,290,696 -$1,548,124 IRR 10.31% 11.79%

Selling Price Grows at 4%, Cash Costs Grow at 5% NPV (17%) -$1,101,659 -$1,322,502 IRR 13.19% 14.98%

Selling Price Grows at 3%, Cash Costs Grow at 5% NPV (17%) -$1,212,758 -$1,453,223 IRR 11.85% 13.45%

(d)

Based on the results of parts (b) and (c), it appears that Wilson should be concerned about the growth rates he is using. The NPV and IRR are significantly affected by changes in the growth rates of selling price and cash costs. In particular, the NPV decreases and the IRR decreases as the growth rate of cash costs exceeds the growth rate of selling price. This suggests that Wilson should be more conservative in his estimates of future growth rates and consider a range of scenarios to assess the sensitivity of the investment to changes in these assumptions