Wansley Lumber is considering the purchase of a paper company. Purchasing the company would require an...

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Wansley Lumber is considering the purchase of a paper company.Purchasing the company would require an initial investment of $300million. Wansley estimates that the paper company would provide netcash flows of $40 million at the end of each year for the next 20years. The cost of capital for the paper company is 13%.
a. Should Wansley purchase the paper company?
b. Wansley realizes that the cash flows in Years 1 to 20 mightbe $30 million per year or $50 million per year, with a 50%probability of each outcome. Wansley can sell the company 2 yearsafter purchase (at Year 2) for $280 million if it no longer wantsto own it. Given this information, does decision-tree analysisindicate that it makes sense to purchase the paper company? Again,assume all cash flow are discounted at 13%
c. Wansley can wait for 1 year and find out whether the cashflows will be $30 million per year of $50 million per year beforedeciding to purchase. Wansley can no longer sell the company 2years after purchase. Does decision-tree analysis indicate that itmakes sense to purchase the paper company? If so, when?
Please show Excel functions and work!

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4.0 Ratings (447 Votes)

A To decide whether to purchase the said company or not we need to calculate Net Present Value of investment in paper company Given details for this are hereunder Initial Investment I 300 Million Net Annual Cash Flow A 40 Million for 20 Years Cost of Capital Kc 13 Therefore Present Value of Future Cash Flows Present Value Interest Factor of Annuity PVIFA PVIFA AI Kc PVIFA 40 13 20 40 70248 See Answer

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