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 or extensive research, it has prepared the following incomplete incremental free cash flow projections (in millions of dollars): Year 0 Free Cash Flow ($000,000s) Revenues - Manufacturing expenses (other than depreciation) - Marketing expenses - CCA = EBIT - Taxes (35%) - Unlevered net income + CCA - Increases in net working capital - Capital expenditures + Continuation value = Free cash flow - 155.00 - 155.00 Years 1-9 Year 10 117.00 - 31.00 - 10.00 ? ? * 2 ? ? - 5.00 ? 117.00 - 31.00 - 10.00 ? ? 7 ? ? ? - 5.00 12.00 ? The relevant CCA rate for the capital expenditures is 15%. 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 are 10% higher than forecast? What is the NPV of this project if revenues are 10% lower than forecast?
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 or extensive research, it has prepared the following incomplete incremental free cash flow projections (in millions of dollars): Year 0 Free Cash Flow ($000,000s) Revenues - Manufacturing expenses (other than depreciation) - Marketing expenses - CCA = EBIT - Taxes (35%) - Unlevered net income + CCA - Increases in net working capital - Capital expenditures + Continuation value = Free cash flow - 155.00 - 155.00 Years 1-9 Year 10 117.00 - 31.00 - 10.00 ? ? * 2 ? ? - 5.00 ? 117.00 - 31.00 - 10.00 ? ? 7 ? ? ? - 5.00 12.00 ? The relevant CCA rate for the capital expenditures is 15%. 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 are 10% higher than forecast? What is the NPV of this project if revenues are 10% lower than forecast?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text: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
extensive research, it has prepared the following incomplete incremental free cash flow projections (in millions of dollars):
Year 0
Free Cash Flow ($000,000s)
Revenues
- Manufacturing expenses (other than depreciation)
- Marketing expenses
- CCA
ZAT
= EBIT
P
- Taxes (35%)
= Unlevered net income
Dow
+ CCA
- Increases in net working capital
- Capital expenditures
+ Continuation value
= Free cash flow
- 155.00
- 155.00
Years 1-9 Year 10
117.00
- 31.00
- 10.00
2
?
=
?
?
?
?
- 5.00
?
117.00
- 31.00
- 10.00
?
7
?
?
?
=
?
n
?
-5.00
12.00
?
The relevant CCA rate for the capital expenditures is 15%. 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 are 10% higher than forecast? What is the NPV of this project if revenues are 10% lower than forecast?
G
Using 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 $ million. (Round to two decimal places.)
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 8 steps with 10 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education