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Submitted by Time on Tue, 2013-07-30 07:49
due on Sat, 2013-08-03 07:48
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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 07:50
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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 15:48
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Problem 23 Bauer Industries case solution

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Problem 8-23
Bauer Industries xx an automobile manufacturer. xxxxxxxxxx is currently evaluating a proposal xx build x plant that will xxxxxxxxxxx lightweight trucks. Bauer plans xx use a xxxx of capital xx xxx xx evaluate xxxx xxxxxxxx xxxxx on xxxxxxxxx xxxxxxxxx it has prepared the xxxxxxxxx incremental free cash xxxx xxxxxxxxxxx (in millions xx xxxxxxxxx
xxxx xxxxxx xxxYear xx
xxxxxxxx100.0 xxxxx
– xxxxxxxxxxxxx expenses
xxxxxx xxxx depreciation) xxxxxxxxxx
– xxxxxxxxx xxxxxxxx -10.0 xxxxx
– xxxxxxxxxxxxxxxxxxxxxx
= xxxx xxxx40.0
– xxxxx (35%) xxxxx-14.0
x xxxxxxxxx net income26.0 xxxx
+ xxxxxxxxxxxx xxxxxxxx
– Additions xx xxxxxxx capitalxxxx -5.0
– xxxxxxx expenditures -150.0
+ Continuation xxxxx 12.0
= xxxx xxxx xxxx xxxxxx36.0 xxxx
a.xxx xxxx base-case scenario, what is xxx xxx xx xxx plant to xxxxxxxxxxx lightweight xxxxxxx
xxxxxxx For xxx xxxxxxxxxx xxx xxx xx 57.27xxxxxxx
b. Based on input from the xxxxxxxxx xxxxxxxxxxx Bauer is

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