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Submitted by Time on Tue, 2013-07-30 08:49
due on Sat, 2013-08-03 08:48
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Problem 23 Bauer Industries case solution

Problem 23 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 12% to evaluate this project. Based on extensive research, it has prepared the following incremental free cash flow projections (in millions of dollars): Year 0 Years 1-9 Year 10 Revenues 100.0 100.0 – Manufacturing expenses (other than depreciation) -35.0 -35.0 – Marketing expenses -10.0 -10.0 – Depreciation -15.0 -15.0 = EBIT 40.0 40.0 – Taxes (35%) -14.0 -14.0 = Unlevered net income 26.0 26.0 + Depreciation + 15.0 + 15.0 – Additions to working capital – 5.0 – 5.0 – Capital expenditures – 150.0 + Continuation value + 12.0 = Free cash flow – 150.0 36.0 48.0 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 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 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 5% per year rather than 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 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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Submitted by Time on Tue, 2013-07-30 08:50
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23

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Problem 23
Bauer xxxxxxxxxx is an automobile xxxxxxxxxxxxx Management is currently evaluating x proposal to build a xxxxx xxxx xxxx manufacture lightweight trucks. xxxxx xxxxx to use a xxxx of xxxxxxx of xxx to evaluate this xxxxxxxx xxxxx xx extensive xxxxxxxxx it has prepared the xxxxxxxxx xxxxxxxxxxx xxxx xxxx xxxx xxxxxxxxxxx xxx xxxxxxxx of xxxxxxxxx
xxxx x Years xxxYear xx
Revenues100.0 xxxxx
– Manufacturing xxxxxxxx
xxxxxx xxxx xxxxxxxxxxxxx-35.0-35.0
– Marketing xxxxxxxxxxxxx xxxxx
– Depreciationxxxxx xxxxx
x EBIT 40.0 xxxx
– xxxxx xxxxx xxxxx-14.0
x xxxxxxxxx xxx xxxxxx26.0 26.0
x xxxxxxxxxxxxx xxxxx 15.0
– xxxxxxxxx to xxxxxxx capital – xxx – 5.0
– xxxxxxx xxxxxxxxxxxx– xxxxx
x Continuation value + xxxx
x xxxx cash flow – xxxxx xxxx xxxx
xxFor this xxxxxxxxx scenario, what xx the NPV of the xxxxx xx xxxxxxxxxxx lightweight trucks?
xxBased on input from the xxxxxxxxx department, Bauer xx

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Submitted by Professor Mus... on Thu, 2014-04-03 16:48
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Problem 23 Bauer Industries case solution

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8-23

xxxxxxxxxxxxxxxxxxxxxxxxx
Problem xxxx
xxxxx xxxxxxxxxx is an automobile xxxxxxxxxxxxx Management xx xxxxxxxxx evaluating a xxxxxxxx xx build a xxxxx xxxx will manufacture lightweight xxxxxxx Bauer xxxxx to xxx a cost xx capital of 12% to xxxxxxxx xxxx project. Based on xxxxxxxxx xxxxxxxxx xx has xxxxxxxx xxx following incremental xxxx xxxx xxxx projections (in millions xx xxxxxxxxx
Year 0xxxxx 1-9xxxx 10
xxxxxxxxxxxxx100.0
– xxxxxxxxxxxxx xxxxxxxx
(other xxxx xxxxxxxxxxxxx -35.0 -35.0
– Marketing expenses -10.0 -10.0
– xxxxxxxxxxxx-15.0xxxxx
= xxxx xxxx40.0
– Taxes (35%)-14.0-14.0
= xxxxxxxxx net xxxxxx xxxx 26.0
x xxxxxxxxxxxx xxxx 15.0
– xxxxxxxxx to working capitalxxxx -5.0
– xxxxxxx xxxxxxxxxxxx xxxxxx
+ Continuation value 12.0
x Free xxxx xxxx xxxxxx xxxx48.0
xxFor xxxx xxxxxxxxx xxxxxxxxx what xx xxx xxx xx the xxxxx xx manufacture xxxxxxxxxxx xxxxxxx
xxxxxxx xxx the base-case, the NPV is 57.27 million
xx xxxxx on xxxxx xxxx the marketing xxxxxxxxxxx Bauer xx

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