9 Bauer Industries is an automobile manufacturer Management is current prepared

Question

9 Bauer Industries is an automobile manufacturer Management is current prepared the incremental frec cash flow projections shown below (in millions of dollars evaluating a proposal to build a plant hat will manufacture light e trucks Bauer plans to use a cost of capital of 12.0% o evaluate this pro ect Based on extensive research it has 10 100.0 -35.0 - 10.0 - 15.0 40.0 - 14.0 26,0 +15.0 -5.0 100.0 -35.0 - 10.0 15.0 40.0 Manufacturing Expenses (other than depreciation) Marketing Expenses Taxes at 35% Unlevered Net Income Dopreciation Additions to Net Working Capital Capital Expenditures Continuation Value Free Cash Flow 26.0 +15.0 -5.0 - 150.0 12.0 48.0 -150.0 36.0 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 10% higher than forecast? What is the NPV if revenues are 10% 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 revenucs and opcrating expenses. Specifically, management would like to assume that revenucs manufacturing expenses, and marketing expenses are as given in the table for year 1 and grow by 2% per year every year starting in year 2. Management also plans to assume that the initial capital expenditures (and therefore depreclation), additions to working capital, and continuation value e nan as n aly spec ed in the able what s he NPV o his project under these alternative assumptions? How does the NP change he evenues and opera ng expenses grow by 5% per year rather an by 2%? 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 yaxs, for discount rates ranging from 5% to 30%. For what ranges of discount rates does the project have a positive NPV? a. For this base-case scenario, what is the NPV of the plant to manufacture lightweight trucks? The NPV of the plant to manufacture lightweight trucks, based on the estimated free cash flow is $ million. (Round to two decimal places.) 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 10% higher than forecast? What is the NPV if revenues are 10% lower than forecast? The NPwof this project if revenues are 10% higher than forecast is $ milion. (Round to wo decimal places.) The NPV of this project if revenues are 10% lower than forecast is$ million. Found to two decimal places.) 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 2% 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 re na as initially specifed in the table what is the NPV of this pro ect under these alternative assumptions? How does the NP change if the re enues and operating expenses gro y 5% per year ather than b 2%? If revenues, manufacturing expenses, and marketing expenses grow by 2% per year every year starting in year 2, the NPV of the estimated free cash flow is $ million. Round to two decimal places.) million. graph with the discount rato on the x axis and the NP If revenues, manufacturing expenses, and m eting expenses grow by 5% per year every year starting in year 2, the NPV of the estimated free cash flow is$ (Round to two decimal places.) ates using the base-case scenario Create on the is, for d. To examine the sensitivity of this pro oct to the discount rate, management would like to computo tho NPV fo diff rent discount discount rates ranging from 5% to 30%. For what ranges of discount rates does the project have positive NPV? The NPV is positive for discount rates below the IRR of %. (Round to one decimal place.)

Explanation / Answer

ans (a)

present value of operating cashflows= 36 * Present value interest factor of annuity for 9 years at 12%

= 36* 5.328= 191.81

present value of last year's cashflow=48 * present value interest factor of $1 at 12% received at the end of 10 yrs

= 48* 0.322= 15.456

NPV= PV of cash inflows - initial investment

=191.81+15.456-150= $57.27

ans (b)

IF REVENUE IS 10% HIGHER

revenue = 110.So operating cash flows $46 every year.last year's cashflow would be 58

present value of operating cashflows will be 46* 5.328= 245.09

present value of last year's cashflow= (46+12) * 0.322=18.68

NPV= 245.09+18.68-150= $113.77

IF REVENUE IS 10% LOWER

revenue will be 90 and operating cash inflows would be26, terminal value will be 38

present value of operating cashflows = 26 *5.328= 138.53

present value of last year's cashflow= 38 * 0.322= 12.24

NPV= 138.53+12.24-150 = $0.77

ans (c)

IF REVENUES AND MANUFACTURING EXPENSES GROW BY 2% EVERY YEAR

total of PV of cash inflows from years 1 to 10 as per the above table= 222.58- initial investment of150 =$72.58

particulars year 0 year 1 2 3 4 5 6 7 8 9 10 revenue          100 102 104.04 106.12 108.24 110.4 112.61 114.86 11716. 11905 mfg exp -35 -35.7 -36.41 -37.14 -37.88 -38.64 -39.41 -40.20 -41 -41.82 marketing -10 -10.2 -10.4 -10.61 -10.82 -11.04 -11.26 -11.49 -11.72 -11.95 depreciation -15 -15 -15 -15 -15 -15 -15 -15 -15 -15 EBT 40 41.1 42.23 43.37 44054 45.72 46.94 48.17 49.44 50.73 unlevered(65%) 26 26.72 27.45 28.20 28.95 29.72 30.51 31.31 32.4 32.98 dep +15 +15 +15 +15 +15 +15 |+15 +15 +15 +15 additions to w/c -5 -5 -5 -5 -5 -5 -5 -5 -5 -5 tcontinuing value +12 capital exp -150 free cashflow -150 36 36.72 37.45 38.20 38.95 39.72 40.51 41.31 42.4 54.98 PVinterest factor @12% 1 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 PV of cashflows -150 32.148 29.27 26.66 24.30 22.08 20.14 18.31 16.69 15.31 17.70

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