Question

Bauer Industries is an automobile manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight trucks. Bauer plans to use a cost of capital of 11.7% to evaluate this project. Based on extensive​ research, it has prepared the following incremental free cash flow projections​ (in millions of​ dollars):

a. For this​ base-case scenario, what is the NPV of the plant to manufacture lightweight​ trucks?

b. Based on input from the marketing​ department, Bauer is uncertain about its revenue forecast. In​ particular, management would like to examine the sensitivity of the NPV to the revenue assumptions. What is the NPV of this project if revenues are 10% higher than​ forecast? What is the NPV if revenues are 10% lower than​ forecast?

c. Rather than assuming that cash flows for this project are​ constant, management would like to explore the sensitivity of its analysis to possible growth in revenues and operating expenses.​ Specifically, management would like to assume that​ revenues, manufacturing​ expenses, and marketing expenses are as given in the table for year 1 and grow by 2% per year every year starting in year 2. Management also plans to assume that the initial capital expenditures​ (and therefore​ depreciation), additions to working​ capital, and continuation value remain as initially specified in the table. What is the NPV of this project under these alternative​ assumptions? How does the NPV change if the revenues and operating expenses grow by 5% per year rather than by 2%​?

d. To examine the sensitivity of this project to the discount​ rate, management would like to compute the NPV for different discount rates. Create a​ graph, with the discount rate on the x​-axis and the NPV on the y​-axis, for discount rates ranging from 5% to 30%. For what ranges of discount rates does the project have a positive​ NPV?

P8-24 (similar to) Question Help O a st of capital of 11.7% to evaluate this proiect. Based on X he revenue assumptions. What is the NPV of this project ng expenses. Specifically, management would like to ent also plans to assume that the initial capital se alternative assumptions? How does the NPV change 99.0 þn the x-axis and the NPV on the y-axis, for discount Bauer Industries is an automobile manufacturer Manageposti autunut OLDSSOL oude slast that will. facture listuialat tulis Boucles to L extensive research, it has prepared the following increme i Data Table - a. For this base-case scenario, what is the NPV of the pla b. Based on input from the marketing department, Bauer if revenues are 10% higher than forecast? What is the NA c. Rather than assuming that cash flows for this project al (Click on the following icon in order to copy its contents into a spreadsheet.) assume that revenues, manufacturing expenses, and mal expenditures (and therefore depreciation), additions to wd Year 0 1-9 10 if the revenues and operating expenses grow by 5% per Revenues 99.0 d. To examine the sensitivity of this project to the discoun rates ranging from 5% to 30%. For what ranges of discou Manufacturing Expenses (other than depreciation) - 37.1 - 37.1 Marketing Expenses - 10.4 - 10.4 a. For this base-case scenario, what is the NPV of the pla Depreciation - 15.4 - 15.4 EBIT 36.1 36.1 The NPV of the estimated free cash flow is $1 million. Taxes at 20% - 7.22 - 7.22 Unlevered Net Income 28.88 28.88 Depreciation + 15.4 + 15.4 Additions to Net Working Capital -4.4 -4.4 Capital Expenditures - 154.0 Continuation Value + 12.1 Free Cash Flow - 154.0 39.880 51.980 Print Done Enter your answer in the answer box and then click CH

Answer 1

Date : 1 Page No. TA) The NPV of the estimate cash flow is :- fove. NPV = 154 + 39.880 x 10.117 + 51.980 1 1171 1117 - 154 + 39.880 112-707-1 + 51.980 0.117 2.707 3.024 - 154 + 340.855][0-6306] + 17-18915 -154+ 214-9432 & 17.18915 78.132 Million (6) Initial Sale 90 100 110 ** NPV 84-23 178.132 132.03 (0) Growth hate 0% 2% 5% INPV 78.132 59-832 36.54 (d) NPV is possible for discount creates below the IRR of 30.5

Date (2) (Page No Niv higher & [110] IS - 2 NPV - 154 + 49.880 x 20.117 1.1079) - 154 +49.880 x 1.707 51.980 0.117 2.707 3.024 - 154 + 426.325x0.6306 + 17-18915 132.03 Nfo lower **190 TS 3_ -154+29.880 - 1.18 Lo-117 11-12 1.119 - 154 +29.880 x 0.6306+ 17 18915 0.117 -154 + 1778.235 - 24.23 If the revenue and operating expenses gone by 51. the wolv be a NW = 11:7/+ 5% & 16.7% - -154 + 39.8 80 x 10.167 = 154 + 139.880/0.167 x 3.025/4.04517 -154+ 179.471+ 11.067 + 36.54 JL 1.167) °15/4.095)+ 0

Date: Page No. $1.99 - If revenu is grow by 2%. Npv 11 7% + 2% = 13.7% - 154 +39.880 / 1 7-1 751.980 6137) 1137 11371 - 154 + 39.880 2.176 51.986 10.1371L 3-176 J 3.611 154 +(291.09] [ 0.685) + 14.395 980 1710 - 154 + 199.45 + 14.395 154 + 213-832 59.832 row 51.98