Arauco Case

1. Should Arauco build the Nueva Aldea project? (Hint: Estimate the project Net Present Value and provide a recommendation considering quantitative and qualitative arguments)

Qualitative arguments

We would suggest the company to go ahead with the the project Nueva Aldea considering next arguments:

Horizontal expansion

The company Arauco should build the project Nueva Aldea, for various reasons related to production, efficiency, access to lower costs and its growth internationally.
Among the reasons that support the construction of the new plant, we consider that Arauco will be located in a specific region (VIII) close to the ports of Lirquén, Coronel and San Vicente where we can find the largest productive
* Initial Investment: It is divided in the first 3 years of construction of the mill. * Residual Value: The last cash flow at year 33 was brought to present value.

2. What are the sources of Arauco’s competitive advantage?

After evaluating Arauco´s position in the market, we could say that some of the sources of competitive advantage could be separated in five areas.

Forests: Arauco was Chile’s largest pine owner with 33% of the country’s total plantations and covered approximately two-thirds of the raw material needed for production. Chilean climatic conditions were ideal for the growth of radiate pine. In Chile, the harvesting of pulp logs could take place 16 to 18 years after planting and high-quality saw logs could be harvested in 25 years. In contrast, pulp logs cultivated in the northern hemisphere were harvested only 18 to 45 years after plantations and sawlogs required 50 to 150 years. It allows to Arauco to outperform its competitors from the northern hemisphere.

Facilities: Arauco`s facilities enables them to produce a variety of products such as pulp, sawlogs, flitches, sawn timber, remanufactured wood products, plywood & fiber panels, posts, and others, as well as, it enables them to optimize the use of the tree according to the different uses of the top portion (pulplogs or MDF), middle portion (saw timber) and lower portion (saw timber and plywood). Having a wide range of different