Npv & Irr

To make the wish lists then after reviewing facility plans and related strategic plans, the management would indicate an approximate level of capital spending for the annual budget. The funds were allocated based on each business's unit needs.

Individual projects were still required to go through a capital- approval process. Project's viability was measured by hurdle rate. Increasing the company's overall return on investment was the objective that should be met by discretionary spending and restrict the amount of capital requests. The 15 percent of hurdle rate had the advantage of being easier to understand than a cost of capital that changes whenever interest rates or company's specific risk changed. (Hurdle rate: the minimum rate of return on a project or investment required by management or investor)

(Return on Investment= (gain from investment - cost of investment) / cost of investment)

In December, Board of Directors make a decision about capital budget, Also an appropriate management level approved individual project. At facility level, small projects were developed and managed. Technology group designed and engineered larger projects.

The Forest-Product Industry

From 1990 to mid-1994, the pulp prices decrease more than 50 percent, but in the mid- 1994 the industry regain pricing power. After restructuring in the forest- products industry, they appointed new CEO in 1993 and 1994 with the goal of creating shareholder value. International Paper hade come through the early 1990's relatively intact, with the same CEO and with a respectable 10.95 percent compound annual growth rate in share price for the years 1990-96.

New Longwood- Processing System at the Redding Mill:

The Redding Mill Woodyard currently:

On-site storage capacity = 30,000 tons (23,000 tons shortwood storage + 5,000 tons chips purchased + 2,000 tons chip storage in the four chip silos) (9days)

Two off-site storage capacity = 80,000 tons (25days)

The new on-site longwood woodyard:

On-site storage capacity = 32,000 tons (25,000 tons longwood storage + 5,000 tons existing purchased - chip storage) (10days)

Two off-site storage capacity = 80,000 tons (25days)

Shutting down Ridgefield would allow IP to eliminate 3 days of storage kept at the Ridgefield facility.

Analysis:

During two years, cost of the new system should be incurred:

Market value of the extra chip storage at Ridding in 1998: $ 800,000

Labor saving in 1998: $ 3.3 million

Reduction