Question

Question #4: Georgia Pacific, Inc. produces a number of products that the company can sell at the split-off point or the company can process the products further and then sold. Use the data below to answer the following questions:

                                            Sales Value            Additional             Sales Value after

              Product                    at Split-off           Variable Costs      Further Processing

New lumber                  $79,800                 $12,000                    $89,000

Weathered lumber          62,000                   14,100                      86,800

Pulp                                 51,000                     9,800                      65,000

a) What is the additional profit that would result from processing weathered lumber further? Show your calculations.

b) Which products should Georgia Pacific process further? Show your calculations.

c) What is the increase in Georgia Pacific’s profit if the appropriate products are processed further?

Question #5: Fontenot Seafood Company is thinking about building a new pier which will cost $280,000. Fontenot expects to get 5 years of use out of the pier, after which it will be sold for $150,000. Fontenot estimates that there will be annual cash flows of $55,000 resulting from the new pier. Fontenot’s borrowing rate is 8% and it cost of capital is 10%.

Required: Prepare an analysis to calculate the net present value of the pier and discuss whether this pier is a good investment for the Company.

Answer 1

4.
a)

Additional Revenue	$           24,800	=86800-62000
Additional Variable Costs	$           14,100
Additional Profit	$           10,700

b)

	New Lumber	Weathered Lumber	Pulp
Additional Revenue	$              9,200	$            24,800	$             14,000
Additional Variable Costs	$           12,000	$            14,100	$                9,800
Additional Profit	$           (2,800)	$            10,700	$               4,200

Weathered Lumber and Pulp should be processed further

c) Increase in Profit = $10700+4200 = $14900

5.
Since, PV tables are not given, i have calculated values myself rounded off to 4 decimal places.
Rate to be used is 10% i.e. cost of capital

PV Annuity @10% for 5 years = 3.7911, PV Factor @10% for 5 years = 0.621

NPV = $55000 x 3.7911 + 150000 x 0.621 - 280000 = $21660.50 or $21661

It is a good investment, since it has positive NPV