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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
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 capital of 12.0% to evaluate this project. Based on extensive research, it has prepared the incremental free cash flow projections shown below (in millions of dollars):
c. Rather than assurring that cash flows for this project are constant, management would like to explore the sensitivity of its analysis to possible growth in revenuee and operating expenses. Specifically. management would like to assume that revenves, manufacturing expenses, and marketing expenses are as given in the tiblo for yoar 1 and grow by 2% per year every year starting in year 2. Management also plans to assume that the initial capitai expenditures (and therefore doprociation). 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 reverwes and operating expenses grow by 5% per year rather than by 2% Step by Step Solution
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