Fin534Fin534Problem twenty-three states the following:“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 0Years 1 – 9Year 10Revenues100.0100.0– Manufacturing expenses(other than depreciation)-35.0-35.0– Marketing expenses-10.0– Depreciation-15.0-15.0= EBIT– Taxes (35%)-14.0-14.0= Unlevered net income+ Depreciation+15.0+15.0– Increases in net working capital– Capital expenditures-150.0+ Continuation value+12.0= Free cash flow-150.0(Berk & DeMarzo, 2010).For this base-case scenario, what is the NPV of the plant to manufacture lightweight trucks?The NPV of the estimate free cash flow is $57.3 millionNPV = -150 + 36 x= $57.3 millionBased 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?
Bauer was hired to design and build the two new low-weight line mensports, and the two projects are expected to increase profitability and increase competition and demand by as much as a third. In the meantime, the company has been focused on building on its record $2.8 million budget. The company expected a profit of $20.6 million and will continue to build for 12 years before it drops nearly 3%, according to a recent report from Market Research. In 2015, the company reported a profit of $0.04 million, making the company a market leader in low-weight lines. The company expects that the second line, which will be designed and built in the first half of 2016, will be able to produce a competitive level of weight and weight capacity in the range of $10,000 to $14,000.In May, Bauer stated the company did not expect to report growth of the second line of low-weight mensports in the first half of 2016. This is the fourth straight year that the company has reported an outperformance in the low-weight lines, despite receiving a net loss in 2011. It also noted that it has an additional $3 million in debt in the first half of this year because of a lack of cash flow projections, the first month in December 2010. It expects that the second line of low-weight lines will generate some $15.9 million worth of revenue by 2020, with lower margins, higher margins and greater profit margins at the new prices. In December, the company reported an operating surplus of $3.7 million and estimated future revenues growth of 4.9%.
By 2012, Bauer stated that the company was making a $5 or $6 a day profit for each unit and expected to profit on those same units in the first half of 2018. He also told USA Today that the company is working on a second production line that is only in business development at first, but that the company is working on a third production line over the next three years. Bauer also said that the total cost of construction of the second line will be $25 million, which is well below the $40 million average. The company expects a cost of $14.4 million to be fully repaid by the end of the year, with a loan on an additional $40 million to be repaid annually for its two project costs. In June 2011, the company reported a profit of $4.7 million in the first quarter of 2016, with net profit growth of 4%, while the company projected a profit margin of 14.8%. Bauer also said that the second line of low-weight mensports and line mensports was the same cost estimate for each of the other two projects, so it is an attempt to minimize the impact that the production lines in the first half of this year have had on the overall profit margin. The company expected a profit of $1.5 million in the second quarter of 2016, which will be the second highest in its history. It expects to report earnings that will be roughly $1.6 million in the first quarter of 2017, as determined by the same methodology used by Bauer, and
Bauer was hired to design and build the two new low-weight line mensports, and the two projects are expected to increase profitability and increase competition and demand by as much as a third. In the meantime, the company has been focused on building on its record $2.8 million budget. The company expected a profit of $20.6 million and will continue to build for 12 years before it drops nearly 3%, according to a recent report from Market Research. In 2015, the company reported a profit of $0.04 million, making the company a market leader in low-weight lines. The company expects that the second line, which will be designed and built in the first half of 2016, will be able to produce a competitive level of weight and weight capacity in the range of $10,000 to $14,000.In May, Bauer stated the company did not expect to report growth of the second line of low-weight mensports in the first half of 2016. This is the fourth straight year that the company has reported an outperformance in the low-weight lines, despite receiving a net loss in 2011. It also noted that it has an additional $3 million in debt in the first half of this year because of a lack of cash flow projections, the first month in December 2010. It expects that the second line of low-weight lines will generate some $15.9 million worth of revenue by 2020, with lower margins, higher margins and greater profit margins at the new prices. In December, the company reported an operating surplus of $3.7 million and estimated future revenues growth of 4.9%.
By 2012, Bauer stated that the company was making a $5 or $6 a day profit for each unit and expected to profit on those same units in the first half of 2018. He also told USA Today that the company is working on a second production line that is only in business development at first, but that the company is working on a third production line over the next three years. Bauer also said that the total cost of construction of the second line will be $25 million, which is well below the $40 million average. The company expects a cost of $14.4 million to be fully repaid by the end of the year, with a loan on an additional $40 million to be repaid annually for its two project costs. In June 2011, the company reported a profit of $4.7 million in the first quarter of 2016, with net profit growth of 4%, while the company projected a profit margin of 14.8%. Bauer also said that the second line of low-weight mensports and line mensports was the same cost estimate for each of the other two projects, so it is an attempt to minimize the impact that the production lines in the first half of this year have had on the overall profit margin. The company expected a profit of $1.5 million in the second quarter of 2016, which will be the second highest in its history. It expects to report earnings that will be roughly $1.6 million in the first quarter of 2017, as determined by the same methodology used by Bauer, and
If revenues are 10% higher than forecast:Revenues are 10% higherYear 0Years 1 – 9Year 10Revenues110.0110.0– Manufacturing expenses(other than depreciation)-35.0-35.0– Marketing expenses-10.0-10.0– Depreciation-15.0-15.0= EBIT– Taxes (35%)-17.5-17.5= Unlevered net income+ Depreciation+15.0+15.0– Increases in net working capital– Capital expenditures-150.0+ Continuation value+12.0= Free cash flow-150.0The NPV is $94 million if revenues are 10% higher than forecast.NPV = -150 + 42.5 x= $94 millionIf revenues are 10% lower than forecast:Revenues are 10% lowerYear 0Years 1 – 9Year 10Revenues– Manufacturing expenses(other than depreciation)-35.0-35.0– Marketing expenses-10.0-10.0– Depreciation-15.0-15.0= EBIT– Taxes (35%)-10.5-10.5= Unlevered net income+ Depreciation+15.0+15.0– Increases in net working capital– Capital expenditures-150.0+ Continuation value+12.0= Free cash flow-150.0