Students consider which capital budgeting approach to take when evaluating a packaging manufacturer's joint venture proposal. Suitable for MBA and undergraduate students, the case presents a scenario in which a lack of short-term profits and the resulting lack of tax payments could make adjusted present value a better choice than weighted average cost of capital. Students also consider how to value the industrial bond financing that would fund construction of a new plant. A supplemental student spreadsheet is available (UVA-F-1624X). Excerpt UVA-F-1624 Rev. Jan. 18, 2011 Baker Packaging, Inc. Tom Hanes of Baker Packaging, Inc., had just finished reviewing the materials for the new joint venture with Thurston, Inc., a large European printing firm. The proposal was for the development of a new packaging and printing plant to be built in Rocky Mount, North Carolina. Even though the company had always used a weighted average cost of capital (WACC) approach to evaluate capital budgeting projects, Hanes was concerned the analysis might not capture all of the proposal's nuances. His concerns centered on the fact that the project would sustain losses in the early years, which would mean no tax payments. In addition, he had some questions concerning how much value to attribute to the industrial revenue bond (IRB) financing that was being used to fund the project. Baker Packaging management needed to make a decision by December 15, 2010. It was already December 1, so Hanes knew he had little time to completehis review. The Company Baker Packaging was founded by John and Karen Baker in 1985 in Medford, Massachusetts. Previously, Karen had been a corporate lawyer for a large multinational company. Her husband, John, trained as an engineer, had worked 15 years at Federal Paper Board Company, Inc., and he believed Federal was not taking full advantage of developing technologies. The couple started their own company with the aim of fully integrating new technology into what had been up to that point a relatively labor-intensive process. Sales had grown from about $ 100,000 in the initial year to over $ 50 million. Baker Packaging operated five plants that produced packaging and paper products for a number of large consumer products companies. (See Exhibit 1 and Exhibit 2 for Baker's recent financial information.) . . .
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