Buhler Industries is a farm implement manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight tractors. Buhler plans to use a cost of capital of 12% to evaluate this project. Based on extensiveresearch, it has prepared the following incomplete incremental free cash flow projections (in millions of dollars):Year 0Free Cash Flow ($000,000s)Revenues- Manufacturing expenses (other than depreciation)- Marketing expenses- CCA= EBIT- Taxes (35%)= Unlevered net income+CCA- Increases in net working capitalCapital expenditures+ Continuation value= Free cash flow- 148.00- 148.00Years 1-9 Year 1094.00- 39.00- 8.00???2?- 5.00?94.00- 39.00- 8.00?????- 5.0012.00?The relevant CCA rate for the capital expenditures is 20%. Assume assets are never sold.a. For this base-case scenario, what is the NPV of the plant to manufacture lightweight tractors?b. Based on input from the marketing department, Buhler 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 are10% higher than forecast? What is the NPV of this project if revenues are 10% lower than forecast?a. For this base-case scenario, what is the NPV of the plant to manufacture lightweighttractors?The NPV is $ million. (Round to two decimal places.)CUsing the indirect method requires a separate calculation of the CCA tax shield. What is the present value of the CCA tax shield?The present value of the CCA tax shield is $30.64 million. (Round to two decimal places.)

Net present value is determined by deducting the initial investment from the current value of cash…

a. For this base-case scenario, what is the NPV of the plant to manufacture lightweight tractors? b. Based on input from the marketing department, Buhler 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 of this project if revenues are 10% lower than forecast?

a. For this base-case scenario, what is the NPV of the plant to manufacture lightweight tractors? b. Based on input from the marketing department, Buhler 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 of this project if revenues are 10% lower than forecast?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The risk-free rate of a capital-budgeting project a company wants to undergo is 5% and the expected market rate of return is 10%. The company has a beta of 0.3 and the project being evaluated has risk equal to the average project that the company has accepted in the past. Using the IRR method, determine an appropriate hurdle rate according to CAPM.
How do I determine which is the correct answer for this problem? A company estimates that an average-risk project has a WACC of 10 percent, a below-average-risk project has a WACC of 8 percent, and an above-average-risk project has a WACC of 12 percent. Which of the following independent projects should the company accept? a. Project A has average risk and an IRR = 9 percent. b. Project B has below-average risk and an IRR = 8.5 percent. c. Project C has above-average risk and an IRR = 11 percent. d. All of the projects above should be accepted. e. None of the projects above should be accepted. Please answer fast I give you upvote.
Harry is trying to evaluate a two year project using NPV. There is uncertainty as to the level of sales (in units) in each of the two years: Year 1 Sales units Probability Year 2 Sales units Probability 10,000 0.3 8,000 0.2 10,000 0.8 15,000 0.7 20,000 0.6 10,000 0.4 Required: (a) On what expected level of sales in Year 1 and 2 should Harry base his NPV calculation? (b) Imagine that the project outlay is £230,000 and each unit sold has a contribution of £10. If Harry’s cost of capital is 10%, what is the project’s…
2.Which of the following are sunk costs for deciding whether to accept or reject a project? i.Payments for maintenance of a factory that would need to be made if the project is accepted.ii.The salaries of employees that would need to be hired to execute the new project.iii.Payments that were made to an economist to generate economic forecasts that were used when deciding whether to accept or reject the project.iv.The additional tax expenses that are expected to result from the profits of the new project. a.iii and iv, but not i or iib.ii and iii, but not i or ivc.iii onlyd.iv only
1) What is the company's WACC? 2) Should the company take the projects? Assume that the projects have the same risk as an average project for your firm. 3) If one project is depended on the other in a way that the company can only take both projects, should it take it?
Please describe NPV, IRR and their relationship. How do you evaluate each for making an investment decision? That is, what is a favorable NPV and IRR for making an investment decision. If you were developing a capital budgeting process at your employer, how would you prioritize your projects? What is the NPV when IRR = WACC, IRR>WACC, and IRR<WACC? There is a duplex for sale in Absecon for $700,000 at this time. It has 2 units that generate a total of $25,000 in gross rent. The property taxes are $4,000, commercial property insurance is $2,000, flood insurance is $1,000, and annual maintenance is $2,000. You expect to sell it in one year at a price growth of 0%. What is the NPV with a WACC of 10%. Is the IRR greater or less than the WACC? Would you invest in this project and why?
Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project’s IRR. Consider the following situation: Green Caterpillar Garden Supplies Inc. is analyzing a project that requires an initial investment of $2,225,000. The project’s expected cash flows are: Year Cash Flow Year 1 $350,000 Year 2 –125,000 Year 3 450,000 Year 4 450,000 Green Caterpillar Garden Supplies Inc.’s WACC is 7%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR): -12.63% 26.46% 30.64% 29.24% If Green Caterpillar Garden Supplies Inc.’s managers select projects based on the MIRR criterion,…
4. Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project's IRR Consider the following situation: Cold Goose Metal Works Inc. is analyzing a project that requires an initial investment of $600,000. The project's expected cash flows are: Year Year 1 Year 2 Year 3 Year 4 Cold Goose Metal Works Inc.'s WACC is 7%, and the project has the same risk as the firm's average project. Calculate this project's modified internal rate of return (MIRR): 17.50% 14.00% Cash Flow $350,000 -100,000 450,000 400,000 19.25%
Use the information provided to answer the questions.Use the information provided below to calculate the following. Where applicable, use the presentvalue tables provided in APPENDICES 1 and 2 that appear after QUESTION 5. QUESTION) Calculate the Accounting Rate of Return (on average investment) of Project B (expressed to twodecimal places). INFORMATION Zeda Enterprises has the option to invest in machinery in projects A and B but finance is only available to invest inone of them. You are given the following projected data:Project A Project BInitial cost R300 000 R300 000Scrap value R40 000 0Depreciation per year R52 000 R60 000Net profitYear 1 R20 000Year 2 R30 000Year 3 R50 000Year 4 R60 000Year 5 R10 000Net cash flowsYear 1 R90 000Year 2 R90 000Year 3 R90 000Year 4 R90 000Year 5 R90 000 Additional informationThe discount rate used by the company is 12%. Transcribed Image Text:Number of Periods 1 2 3 4 5 6 7 8 m 10 11 12 13 14 15 1% 2% 0.9901 0.9804 0.9709 3% 3.9020 3.8077…

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