In December 2019, Bob Prescott, the controller for the BlueRidge Mill, was considering the addition of new on-site long-woodwoodyard. The addition would have two primary benefits: toeliminate the need to purchase short-wood from an outside supplierand create the opportunity to sell short-wood on the open market asa new market for Worldwide Paper Company (WPC). The new woodyardwould allow the Blue Ridge Mill not only to reduce its operatingcosts but also to increase its revenues. The proposed woodyard willutilise new technology that allows tree-length logs, calledlong-wood, to be processed directly, whereas the current processrequired short-wood, which had to be purchased from the ShenandoahMill. This nearby mill, owned by a competitor, has excess capacitythat allows it to produce more short-wood than it needs for its ownpulp production. The excess is sold to several different mills,including the Blue Ridge Mill. Thus, adding the new long-woodequipment would mean that Prescott would no longer need to use theShenandoah Mill as a short-wood supplier and that the Blue RidgeMill would instead compete with the Shenandoah Mill by selling onthe short-wood market. The question for Prescott was whether theseexpected benefits were enough to justify the $18m capital outlayplus the incremental investment in working capital over thesix-year life of the investment. Construction would start within afew months, and the investment outlay would be spent over twocalendar years: $16m in 2020 and the remaining $2m in 2021. Whenthe woodyard begins operating in 2021, it would significantlyreduce the operating costs of the mill. These operating savingswould come mostly from the difference in the cost of producingshort-wood on-site versus buying it on the open market and wereestimated to be $2m for 2021 and $3.5m per year thereafter.Prescott also planned on taking advantage of the excess productioncapacity afforded by the new facility by selling short-wood on theopen market as soon as possible. For 2021, he expected to showrevenues of approximately $14m, as the facility came on-line andbegan to break into the new market. He expected shortwood sales toreach $20m in 2022 and continue at the $20m level through 2026.Prescott estimated that the cost of goods sold (before includingdepreciation expense) would be 75%. In addition to the capitaloutlay of $18m, the increased revenues would necessitate higherlevels of inventories and accounts receivable. Therefore the amountof working capital investment each year would equal 15% ofincremental sales for the year. At the end of the life of theequipment, in 2026, all the networking capital on the books wouldbe recoverable at cost fully. Taxes would be paid at a 30% rate,and the equipment depreciation is to be calculated on astraight-line basis over the six-year life to zero balance.However, the new equipment is estimated to have a salvage value(scrap value) of $3m at the end of its life. WPC’s accountants havetold Prescott that depreciation charges could not begin until 2021,when all the $18m had been spent and the equipment is in service.WPC has a company policy to use 15% as the hurdle rate for suchinvestment opportunities. The hurdle rate is based on the study ofthe company’s cost of capital conducted 5 years ago. Required:

a. Outline reasons why Prescott may be uneasy using the 15%hurdle rate for a discount rate.

b. Perform a sensitivity analysis on NPV of the project on thefollowing scenarios :

(i) Sales increases/decreases by 10%.

(ii) Cost of capital increases/decreases by 10% . Comment on thefeasibility of the project under each scenario. c. The global paperand pulp industry, one of the world largest industries, has beengrow ing slowly, at a rate much less than expected over the last 20years. The price chart below show s that the Products IndustryIndex on average grew at around 2.5% per year over the last 20years , while lumber futures contract prices have negative growth.Some analysts believe that the industry needs more structuralchange to counter disruption of technology and tackle socialimpacts due to climate change. Identify and analyze threequalitative risk factors (ie . factors which are unquantifiable atpresent) faced by the industry. How would Bob Prescott considerthese factors in evaluating the feasibility of the new on - sitelong - wood woodyard ?