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Bauer industries is an automobile manufacturer. management is currently evaluating a proposal ... Question: Bauer Industries...

Bauer industries is an automobile manufacturer. management is currently evaluating a proposal ... Question: Bauer Industries is an automobile manufacturer. Management is currently evaluating a proposal to ... 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 12.4% to evaluate this project. Based on extensive​ research, it has prepared the incremental free cash flow projections shown below​ (in millions of​ dollars):

year 0 1-9 10
Revenues 102.5 102.5

Manufacturing Expenses​ (other than​ depreciation)

-33.8 -33.8

Marketing Expenses

-10.4 -10.4

Depreciation

-15.0 -15.0

EBIT

43.3 43.3
Taxes at 35​% -15.2 -15.2
Unlevered Net Income 28.1 28.1

Depreciation

+15.0 +15.0

Additions to Net Working Capital

-4.7 -4.7

Capital Expenditures

-149.7

Continuation Value

+12.4

Free Cash Flow

-149.7

38.4

50.8

a. For this​ base-case scenario, what is the NPV of the plant to manufacture lightweight​trucks? b. Based on input from the marketing​ department, Bauer 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 8% higher than​ forecast? What is the NPV if revenues are 8% lower than​ forecast? 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​ revenues, manufacturing​expenses, and marketing expenses are as given in the table for year 1 and grow by 3% 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 6%per year rather than by 3%​? 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 discount 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?

Solutions

Expert Solution

a]

NPV is calculated using NPV function in Excel. NPV is $67.86 million

b]

If revenues are 8% higher than forecast, NPV is $97.49 million

If revenues are 8% lower than forecast, NPV is $38.24 million

c]

If revenues, manufacturing expenses and marketing expenses grow by 3% every year, NPV is $92.02 million

If revenues, manufacturing expenses and marketing expenses grow by 6% every year, NPV is $119.86 million

d]

NPV is calculated at each percentage from 5% to 30% using the NPV formula

NPV at 5% is $154.77 million

NPV at 6% is $140.18 million

This is plotted on a graph below :

The project has positive NPV from 5% to 22% rate


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