3
Case 90
Northern Forest Products
Cost of Capital
Directed
Northern Forest Products (NFP) was established in the 1800s to log timber in the Great North Woods. In response to changing conditions, the company underwent radical changes in the way it operates and currently it is a large multidivisional corporation. The major focus of the company remains managing over one million acres of timber production and overseeing the manufacture of consumer paper products from pulp derived from its land holdings. Over the years the company has diversified into several other related businesses, such as a moderately sized mill that produces paneling and wood flooring. This operation has developed a consistent outlet for all of its output and therefore is stable. The company is also involved in real estate as a result of developing some of the prime lake front properties from its forestlands for residential and private recreational use. Successful property development during the 1970s resulted in expanded real estate holdings. However, residential development was particularly hard hit during a recent economic downturn, and the company struggles in this area. NFP is aware of the increasing international demand for wood products and is concerned about recent environmental pressures concerning logging. The company believes that diversification strengthens its overall economic health and, therefore, recently acquired a plastics firm specializing in a high quality flooring product that looks like natural wood, but is actually tougher than wood because it is resistant to fading, staining, burns, and scratches. The synthetic product is currently marketed to wholesale customers currently purchasing the company’s wood flooring. NFP initially was concerned about potential cannibalization of the wood floor division by the plastics division if customers substituted one product for the other. However, the impact has been negligible. Because of the unique nature of plastics manufacturing and the geographic location of the production facility, the company considers the wood milling and plastics production as two separate operations