Revenues −Manufacturing Expenses −Marketing Expenses −Depreciation Year 0 Years 1 to 10 3.9 −0.5 −0.15 −0.4...

Revenues −Manufacturing Expenses −Marketing Expenses −Depreciation	Year 0	Years 1 to 10 3.9 −0.5 −0.15 −0.4
=EBIT −Taxes (40%)		2.85 −1.14
=Unlevered net income +Depreciation −Additions to Net Working Capital −Capital Expenditures	−7	1.71 +0.4 −0.4
=Free Cash Flow		1.71

Panjandrum Industries, a manufacturer of industrial piping, is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems. It has made the above estimates of free cash flows resulting from such a decision (all quantities in millions of dollars). There are some concerns that estimates of manufacturing expenses may be low, due to the rising cost of raw materials. What is the break-even point for manufacturing expenses, if all other estimates are correct and the cost of capital is 12%?

Solutions

Expert Solution

Assuming Capital Expenditure is 8.00

Revenue	3.90
Manufacturing Exp	-0.50
Marketing Exp	-0.15
Depreciation	-0.40
EBIT	2.85
Taxes @ 40%	-1.14
Unlevered Net Income	1.71
Depreciation	0.40
Addition to Net Working Capital
Capital Expenditure	-0.40
Free Cash Flow	1.71

Capital Expenditure	8.00
Cash flow per year	1.71
Year	10
NPV	1.66188

Using a financial calculator, CF0= -8, CF1=1.71, F1=10 ;calculate NPV at 12% equals 1.66188

I	10.00
PMT	0.29413

Pre-Tax Manufacturing Expense	0.49

using TVM keys, PV=1.66188, N=10, I=10; calculate PMT=0.29413.

Pretax manufacturing expenses=0.29413 / 0.6=$0.49 million

ekkarill92 answered 10 months ago

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