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 onextensive research, it has prepared the following incomplete incremental free cash flow projections (in millions of dollars):Year 0Free Cash Flow ($000,000s)Revenues- Manufacturing expenses (other than depreciation)- Marketing expenses- CCAZAT= EBITP- Taxes (35%)= Unlevered net incomeDow+ CCA- Increases in net working capital- Capital expenditures+ Continuation value= Free cash flow- 155.00- 155.00Years 1-9 Year 10117.00- 31.00- 10.002?=????- 5.00?117.00- 31.00- 10.00?7???=?n?-5.0012.00?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 ifrevenues are 10% higher than forecast? What is the NPV of this project if revenues are 10% lower than forecast?GUsing the indirect method requires a separate calculation of the CCA tax shield. What is the present value of the CCA tax shield?The present value of the CCA tax shield is $ million. (Round to two decimal places.)

NPV stands for Net Present Value. It is a financial metric used to evaluate the profitability and…

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 or extensive research, it has prepared the following incomplete incremental free cash flow projections (in millions of dollars): Year 0 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 - 155.00 - 155.00 Years 1-9 Year 10 117.00 - 31.00 - 10.00 ? ? * 2 ? ? - 5.00 ? 117.00 - 31.00 - 10.00 ? ? 7 ? ? ? - 5.00 12.00 ? 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?

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 4E: Determine cash flows Natural Foods Inc. is planning to invest in new manufacturing equipment to make...