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)	Year 0	Years 1–9	Year 10
Revenues		102.00	102.00
−Manufacturing expenses​ (other than​ depreciation)		−38.00	−38.00
−Marketing expenses		−10.00	−10.00
−CCA		​?	​?
equals=EBIT		​?	​?
−Taxes ​(35%)		​?	​?
=Unlevered net income		​?	​?
+CCA		​?	​?
−Increases in net working capital		−5.00	−5.00
−Capital expenditures	−151.00
+Continuation value			10.00
=Free cash flow	minus−151.00151.00	​ ?	​?

The relevant CCA rate for the capital expenditures is 20%. 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?  

Answer 1

Solution: