Reference no: EM132640127

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 11.7% to evaluate this project. Based on extensive? research, it has prepared the following incremental free cash flow projections? (in millions of? dollars): LOADING...

Year                                                                          0          1-9 10
Revenues                                                    105.0         105.0
Manufacturing Expenses (other than depreciation) -37.9    -37.9
Marketing Expenses                                         -9.6           -9.6
Depreciation                                                   -14.8         -14.8
EBIT                                                               42.7         42.7
Taxes at 20%                                                   -8.54       -8.54
Unlevered Net Income                                         34.16       34.16
Depreciation                                                      +14.8       +14.8
Additions to Net Working Capital                              -4.1          -4.1 
Capital Expenditures                                         -148.0
Continuation Value                                                +12.7
Free Cash Flow -148.0                                        44.860             57.560

Problem a. For this? base-case scenario, what is the NPV of the plant to manufacture lightweight? trucks?

Problem 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?

Problem 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%??

Problem d. To examine the sensitivity of this? (base-case scenario) project to the discount? rate, management would like to compute the NPV for different discount rates. 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?