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): 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 Year 0 Years 1-9 Year 10 113.00 - 37.00 -8.00 -145.00 ? ? 2 ? ? - 5.00 -145.00 - 5.00 113.00 - 37.00 - 8.00 - Increases in net working capital Capital expenditures + Continuation value = Free cash flow 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 are 10% higher than forecast? What is the NPV of this project if revenues are 10% lower than forecast? ? ? ? ? 2 ? -5.00 - 5.00 10.00 ? 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 S million. (Round to two decimal places.)
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): 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 Year 0 Years 1-9 Year 10 113.00 - 37.00 -8.00 -145.00 ? ? 2 ? ? - 5.00 -145.00 - 5.00 113.00 - 37.00 - 8.00 - Increases in net working capital Capital expenditures + Continuation value = Free cash flow 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 are 10% higher than forecast? What is the NPV of this project if revenues are 10% lower than forecast? ? ? ? ? 2 ? -5.00 - 5.00 10.00 ? 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 S million. (Round to two decimal places.)
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
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):
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
- Increases in net working capital
- Capital expenditures
+ Continuation value
= Free cash flow
Year 0
Years 1-9 Year 10
113.00
-37.00
-8.00
-145.00
-145.00
?
?
?
?
?
-5.00
-5.00
?
113.00
- 37.00
- 8.00
?
?
?
?
?
- 5.00
- 5.00
10.00
?
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
are 10% higher than forecast? What is the NPV of this project if revenues are 10% lower than forecast?
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 S
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 2 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education