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Buhler Industries is a farm implement manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight tractors. Buhler plans
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) Revenues - Manufacturing expenses (other than depreciation) -Marketing expenses - CCA = EBIT -Taxes (35%) Unlevered net income +CCA -Increases in net working capital -Capital expenditures + Continuation value Free cash flow Year 0 -151.00 Years 1-9 Year 10 110.00 - 35.00 - 11.00 ? ? ? ? ? -5.00 110.00 -35.00 - 11.00 ? ? ? ? 2 ? -5.00 12.00 ? -151.00 The relevant CCA rate for the capital expenditures is 15%. 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?
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a To calculate the NPV Net Present Value of the project we need to discount the incremental free cash flows to their present value and subtract the in...Get Instant Access to Expert-Tailored Solutions
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