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 onextensive 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+ CCAIncreases in net working capital- Capital expenditures+ Continuation value= Free cash flowYear 0 Years 1-9 Year 10103.00- 32.00- 9.00?????- 5.00- 144.00103.00- 32.00- 9.00?????- 5.00?10.00?- 144.00The 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 are10% 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 $million. (Round to two decimal places.)

Net present value or NPV can be defined as the capital budgeting tool that is used to make a…

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 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 $ million. (Round to two decimal places.)

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 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 $ million. (Round to two decimal places.)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

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
- Capital expenditures
+ Continuation value
= Free cash flow
Year 0 Years 1-9 Year 10
103.00
- 32.00
- 9.00
?
?
?
?
?
- 5.00
- 144.00
103.00
- 32.00
- 9.00
?
?
?
?
?
- 5.00
?
10.00
?
- 144.00
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?
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.)

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Step 2: a. Determine the NPV of the plant to manufacture lightweight tractors (base case scenario).

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Step 3: b. Determine the NPV of the plant to manufacture lightweight tractors at different revenues.

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