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Bauer industries is an automobile manufacturer. Management is currently evaluating A proposal to build a plant that will manufacture lightweight trucks. Bauer plans to use a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the incremental
a. For this base-case scenario, what is the
| 1 | Year | 0 | 1-9 | 10 |
| 2 | Revenues | 100.0 | 100.0 | |
| 3 | Manufacturing Expenses (other than |
-35.0 | -35.0 | |
| 4 | Marketing Expenses | -10.0 | -10.0 | |
| 5 | Depreciation | -15.0 | -15.0 | |
| 6 | EBIT | 40.0 | 40.0 | |
| 7 | Taxes @35% | -14.0 | -14.0 | |
| 8 | Unlevered Net Income | 26.0 | 26.0 | |
| 9 | Depreciation | +15.0 | +15.0 | |
| 10 | Additions to Net Working Capital | -5.0 | -5.0 | |
| 11 | Capital Expenditures | -150.0 | ||
| 12 | Continuation Value | +12.0 | ||
| 13 | Free Cash Flow | -150.0 | 36.0 | 48.0 |
b. Based on input from the marketing department. Bauer is uncertain about its revenue
c. Rather than assuming that cash flows for this project are constant, management would like to explore the sensitivity of its analysis to possible growth in revenues and operating expenses. Specifically management would like to assume that rev- enues, manufacturing expenses, and marketing expenses are as given in the table for year 1 and grow by 2% per year every year starting in year 2. Management also plans to assume that the initial capital expenditures (and therefore depreciation), additions to working capital, and continuation value remain as initially specified in the table. What is the NPV of this project under these alternative assumptions? How does the NPV change if the revenues and operating expenses grow by 5% per year rather than by 2%?
d. To examine the sensitivity of this project to the discount rate, management would like to compute the NPV for different discount rates. Create a graph, with the dis- count rate on the x-axis and the NPV on the y-axis, for discount rates ranging from 5% to 30%. For what ranges of discount rates does the project have a positive NPV?
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Chapter 9 Solutions
EBK FUNDAMENTALS OF CORPORATE FINANCE
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