Question

Bauer Industries is a truck manufacturer. Management is currently evaluating a proposal to develop a new truck model. The company decided to start targeting urban females as potential truck owners. The life of this project is estimated at 3 years. Management has calculated that the costs of building another factory line equal $50,000,000, which will be depreciated using a straight-line schedule over 10 years. The company will incur design and engineering costs of another $6,000,000 in year 0. The manufacturer expects a working capital contribution of $15,000,000 to build necessary inventory in year 0. Bauer expects to sell 5,000 trucks at a wholesale price of $60,000 in year 1. Revenue is expected to increase by 15% year-over-year in following years. Costs of goods sold are estimated at 40% of truck sales. Selling, general and administrative expenses equal to 20% of truck sales every year. Assume the tax rate of 35% and cost of capital of 10% Hint: do not include depreciation in years 4 through 10 in the calculation of project's NPV. A. Calculate Bauer's net income in years 1-3 A Net Income - (Revenue - Costs of goods sold - Selling, general & administrative expenses - depreciation)*(1-tax rate) preciation cost of building factory line/life of factory line = $50,000,000/10 - $5,000,000 Years Revenue $300,000,000 $345,000,000 $396,750,000 Costs of goods sold $120,000,000 $138,000,000 $158,700,000 SGBA expenses $60,000,000 $5,000,000 $69,000,000 $5,000,000 $79,350,000 $5,000,000 Depreciation Income before tax $115,000,000 $133,000,000 $153,700,000 Taxes $40,250,000 $74,750,000 $46,550,000 $86,450,000 $53,795,000 $99,905,000 Net Income B. Calculate NPV of the project C. Bauer decided to continue the project. They estimate that starting year 4 the annual free cash flows are expected to grow by 3% a year indefinitely. Calculate the NPV of this project Words 254 of 293

Answer 1

Net, Present value is also known as Current value of Future Expected. Cash flows. All the expected future Cath flows generated by the Project will be discounted at a discount rate for Calculating the NPV NPV = FCF Where for Colol g Looodopvolt Ecolat n a free Cash flows s luterest rate or Discount rate or Cost of capital a Noolof Penods

hirst of All we Net to calculate Intial out flows intial outflow: is known as total cost of. Project at tao Cost of Buildinding another 2 $ 59000,000 factory line Add! design & Engnerning Cost incurred 24 faol vol$ 60,00000 Add: Intial working on $15.000000 Capital Reaurement Total Intial Cost $ 7000 000 Initial Cost of project is $ 41 Millions !

Calculation of free cash flows Year1 Yeara - Year? Net Income $74, 750000 $86,450,000 $99,905000 Add: depni $ 5000000 $ 5000000 $ 5000000 FCF $79, 750000 $91, 450000 $104905000 Calculation of NPV of Project NAV + $ 71000000 + $79.750000 (1.1olo (1.10) $ 91450000 + $ 104905000 ullo 2 (1.1093 INPV = - $71000,000 + $ 72500000 + $ 75578512 + $78816679 = $ 155,895,191 @ free cash flows Yr 4 IfCFy a $104905000 X1:03 - $108052150 30 a 10%

Calculation of Terminal vatrice vou . $.108052150 - $ 1543,602143 0.10-0.03 Calculation of NPV of Project: NPV 2 $ H000 000 + $ 79750000 + " YO HE (1.1090, ciotola E') $ 91,950000 + $ 10490 5000 + I abonoj ( 102, 1 (1.103 klusal $ 1543602143 ( 1010)3 NAV - - $ 7000 000 + $ 72500000 + $755 78512 +$78816679 + $ 1159731137 NPV = $13.15626328