Bauer Industries, NPV, forecasts, related issues
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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 12% to evaluate this project. Based on extensive research, it has prepared the following incremental free cash projections (in millions):
a) For this base-case scenario, what is the NPV of the plant to manufacture light weight 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 NVP of this project if revenues are 10% higher than forecast? What is the NVP 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 revenues and operating expenses. Specifically, management would like to assume that revenues, manufacturing expenses, and marketing expenses are as given in the table for year1 and grow by 2% per every year starting in year 2. Management also plans to assume that the initial capital expenditures (and therefore depreciation), addition to working capital, and continuation value remain as initially specified in the table. What is NPV of this project under these alternative assumptions? How does NPV change if the revenues and operating expenses grow 5% per year rather than by 2%?
d) To examine the sensitivity of this project of the discount rate, management would like to compute the NPV for different rates. Create a 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?
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The solution provides a detailed answer to each question presented for Bauer Industries, including NPV, scenario analysis for each question, graphs, and other relevant information.
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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 12% to evaluate this project. Based on extensive research, it has prepared the following incremental free cash projections (in millions):
a) For this base-case scenario, what is the NPV of the plant to manufacture light weight trucks?
b) Based on input from the marketing ...
Purchase this Solution
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