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I need help with both c and d. Buhler Industries is a farm implement manufacturer. Management is currently evaluating a proposal to build a plant
I need help with both c and d.
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 incremental free cash flow projections (in millions of dollars): Year 0 Years 1-9 95.00 - 31.00 - 11.00 Year 10 95.00 - 31.00 - 11.00 Free Cash Flow ($000,000s) Revenues - Manufacturing expenses (other than depreciation) - Marketing expenses - CCA = EBIT Taxes (35%) = Unlevered net income + CCA ? ? ? ? ? ? ? ? ? ? -5.00 -5.00 - 149.00 - Additions to working capital - Capital expenditures + Continuation value = Free cash flow + 10.00 - 149.00 ? ? The relevant CCA rate for capital expenditures is 20%. Assume assets are never sold. c. Rather than assuming cash flows for the project are constant, management would like to explore the sensitivity of their 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 3% starting in year 2. Management also plans to assume that the initial capital expenditures (and therefore CCA), 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 7% per year rather than by 3%? 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 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? c. What is the NPV if revenues, manufacturing expenses, and marketing expenses grow by 3% and initial capital expenditures, additions to working capital, and continuation value remain the same? NPV is $ million. (Round to two decimal places.)Step by Step Solution
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