Problem: 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):
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Year 0
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Year 1-9
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Year 10
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Revenues
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100.0
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100.0
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- Manufacturing Expenses
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|
|
|
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(other than Depreciation)
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-35.0
|
-35.0
|
|
- Marketing Expenses
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-10.0
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-10.0
|
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- Depreciation
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-15.0
|
-15.0
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= EBIT
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40.0
|
40.0
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- Taxes
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-14.0
|
-14.0
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= Unlevered Net Income
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26M
|
26M
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|
+ Depreciation
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15.0
|
15.0
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- Additions to Working Capital
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-5.0
|
-5.0
|
|
- Capital Expenditures
|
-150.0
|
|
|
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+ Continuation Value
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|
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12M
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= Free Cash Flow
|
-150.0
|
36M
|
48M
|
Q1. For this base-case scenario, what is the NPV of the plant to manufacture lightweight trucks?
Q2. Based 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?