Question

Bauer Industries is an automobile manufacturer. Management is cuctently evaluating a proposal to build a plant to manufacture lightweight trucks Bauer plans to use a cost ofcapital of 10% to evaluate this project. The plant will cost $150 million today to build, and will be depreciated on a straight-line basis over 10 years to a final book value of SO. The company's working capital requirements wil increase from $40 mullion to s50 milion inaediately (for the purchase of raw materials and supplies), and stay at that level until year 10, when working capital will decrease to its original level. Bauer has developed the following additional anual incremental cash flow projections (all dollars in millions) for years 1 through 10 The company's marginal tax rate is 40%. Revenues Manufacturing Expenses (other than depreciation) Marketing Expenses 100.0 35.0 10.0 In addition, the plant is estimated to have a (pre-tax) liquidation value of $12.0 million at the end of its lifetime. Show the annual free cash flows expected from the project. What is the NPV of the plant to manufacture lightweight trucks?

Answer 1