Essay about Capital

Capital

Capital Budgeting

Job #2

Breana N. Rainge

23. Bauer Industries can be an automobile manufacturer. Management happens to be evaluating a proposal to build a plan which will manufacture lightweight trucks. Kafig plans to utilize a cost of capital of 12% to evaluate this kind of project. Based upon extensive analysis, it has well prepared the following incremental free cash flow projections (in millions of dollars):

| Year 0| 12 months 1-9| Year 10

Revenues| | 75. 0| 95. 0

-Manufacturing expenses (other than depreciation)| | -35. 0| -35. 0| -Marketing expenses| | -10. 0| -10. zero

-Depreciation| | -15. 0| -15. zero

=EBIT| | 40. 0| 40. 0

-Taxes (35%)| | -14. 0| -14. 0

=Unlevered net income| | 26. 0| 26. 0

+Depreciation| | +15. 0| +15. 0

-Increases in net working capital| | -5. 0| -5. 0

-Capital expenditures| -150. 0| |

+Continuation value| | | +12. 0

=Free cash flow| -150. 0| 36. 0| 48. zero

A. For this base-case scenario, what is the NPV of the plant to make lightweight pickup trucks? B. Based upon input through the marketing department, Bauer can be uncertain regarding its earnings forecast. Particularly, management would like to examine the sensitivity in the NPV to the revenue presumptions. What is the PV with the project in the event revenues will be 10% greater than forecast? What is the NPV is profits are 10% lower than outlook? C. Rather than assuming that cash flows in this project happen to be constant, managing would like to explore the level of sensitivity of its analysis to possible development in earnings and functioning expenses. Especially, management would like to assume that income, manufacturing expenses, and advertising expenses will be as given in the stand for season 1 and grow simply by 2% per year every year beginning in yr 2 . Managing also strategies to imagine the initial capital expenditures (and therefore depreciation), additions to working capital, and continuation value stay as initially specified in the table. Precisely what is the NPV of this...