Question

Bauer Industries is a truck manufacturer. Management is currently evaluating a proposal to develop a new truck model. The company decided to start targeting urban females as potential truck owners. The life of this project is estimated at 3 years. Management has calculated that the costs of building another factory line equal $60,000,000, which will be depreciated using a straight line schedule over 10 years. The company will incur design and engineering costs of another $5,000,000 in year 0. The manufacturer expects a working capital contribution of $15,000,000 to build necessary inventory in year 0. Bauer expects to sell 6,000 trucks at a wholesale price of $60,000 in year 1. Revenue is expected to increase by 15% year-over-year in following years. Costs of goods sold are estimated at 40% of truck sales. Selling, general and administrative expenses equal to 20% of truck sales every year. Assume the tax rate of 35% and cost of capital of 10%. Hint: do not include depreciation in years 4 through 10 in the calculation of project’s NPV.

A. Calculate Bauer’s net income in years 1-3

B. Calculate free cash flow in year 0

C. Calculate NPV of the project

Answer 1

Calculation Of Net Income

Net Income
Particulars	Year 1	Year 2	Year 3
Sale Revenue	360,000,000	414,000,000	476,100,000
($60,000 * 6,000 units)		(360000000*1.15)
Less: Cost of Goods sold	144,000,000	165,600,000	190,440,000
(360,000,000*40%)
Less: Selling, general and admin Expenses	72,000,000	82,800,000	95,220,000
(360,000,000*20%)
Less: Depreciation on Equipment	6,000,000	6,000,000	6,000,000
(60,000,000/10)
Net operating profit Before Taxes	138,000,000	159,600,000	184,440,000
Less: Taxes @ 35%	48,300,000	55,860,000	64,554,000
Net operating profit less adjusted taxes (NOPLAT)	89,700,000	103,740,000	119,886,000

Calculate free cash Flow in Year 0

Operating Free Cash Flow
	Year 0
Initial Cost
Cost of development of factory	60,000,000
Design and Engineering costs	5,000,000
Working Capital inflow/(outflow)	15,000,000
Total cash outflow	80,000,000

Calculation of NPV

Operating Free Cash Flow
	Year 0	Year 1	Year 2	Year 3	Total
Initial Cost
Cost of development of factory	(60,000,000)
Design and Engineering costs	(5,000,000)
Working Capital inflow/(outflow)	(15,000,000)			15,000,000
Cash receipts		360,000,000	414,000,000	476,100,000
Cash Payments for purchases		(144,000,000)	(165,600,000)	(190,440,000)
Selling, general and admin Expenses		(72,000,000)	(82,800,000)	(95,220,000)
Payment of Taxes		(48,300,000)	(55,860,000)	(64,554,000)
Cash Flow	(80,000,000)	95,700,000	109,740,000	140,886,000
Present Value of $ 1 at @ 10%	1	0.91	0.83	0.75
Present Value		87,087,000	91,084,200	105,664,500	283,835,700
Initial Cost					(80,000,000)
Net Present Value					203,835,700