Corporate Finance: Instructor\'s Manual Applied Corporate Finance

Aswath Damodaran 253

Viability of Paper Plant: Sensitivity to Price per Ton

Clearly NPV goes down as the price per ton goes down. As a decision maker,

then this analysis is useful on two levels:

At the point of decision making, it provides a break even point for when

the project stops being viable. The question then might be: How likely is

it that prices will drop below $ 3 35 per ton?

It can be used as a tool in risk management. It is conceivable, for

instance, that Aracruz might be able to hedge against the possibility of

paper prices dropping below $ 335 (using options or forward contracts)