Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Buhler Industries is a farm implement manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight tractors. Buhler plans to

Buhler Industries is a farm implement manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight tractors. Buhler plans to use a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incomplete incremental free cash flow projections (in millions of dollars):

Free Cash Flow ($000,000s)

Year 0

Years

19

Year 10

Revenues

93.00

93.00

Manufacturing

expenses (other than depreciation)

36.00

36.00

Marketing

expenses

9.00

9.00

CCA

?

?

=EBIT

?

?

Taxes

(35%)

?

?

=Unlevered

net income

?

?

+CCA

?

?

Increases

in net working capital

5.00

5.00

Capital

expenditures

143.00

+Continuation

value

11.00

=Free

cash flow

143.00

?

?

The relevant CCA rate for the capital expenditures is10%.

Assume assets are never sold.

a. For this base-case scenario, what is the NPV of the plant to manufacture lightweight tractors?

b. Based on input from the marketing department, Buhler 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 of this project if revenues are 10% lower than forecast?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Personal Finance Turning Money Into Wealth

Authors: Arthur J Keown

5th Edition

0136070620, 9780136070627

More Books

Students also viewed these Finance questions