Buhler Industries is a farm implement manufacturer. Management is currently eval
ID: 2789635 • Letter: B
Question
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) Year 0 Years 1-9 Year 10 106.00 - 32.00 - 12.00 106.00 - 32.00 - 12.00 Marketing expenses = EBIT -Taxes (35%) = Unlevered net income + CCA - Increases in net working capital -5.00 -5.00 Capital expenditures Continuation value - 142.00 12.00Explanation / Answer
Answer a Calculation of NPV of the plant to manufacture lightweight trucks (base case scenario) (in million dollars) Year 0 Year 1-9 Year 10 NPV Revenues $106.00 $106.00 - Manufacturing expenses -$32.00 -$32.00 - Marketing Expenses -$12.00 -$12.00 - CCA -$14.20 -$14.20 = EBIT $47.80 $47.80 - Taxes @ 35% -$16.73 -$16.73 = Unlevered net income $31.07 $31.07 + CCA $14.20 $14.20 - Increases in net working capital -$5.00 -$5.00 - Capital expenditure -$142.00 + Continuation value $12.00 = Free Cash flow -$142.00 $40.27 $52.27 Annuity factor @ 12% 1.00000 5.32825 0.32197 Present Values -$142.00 $214.57 $16.83 $89.40 Yearly CCA = Depreciable value * CCA rate = $142 * 10% = $14.2 Answer b Calculation of NPV of the plant to manufacture lightweight trucks (revenues are 10% higher) (in million dollars) Year 0 Year 1-9 Year 10 NPV Revenues $116.60 $116.60 - Manufacturing expenses -$32.00 -$32.00 - Marketing Expenses -$12.00 -$12.00 - CCA -$14.20 -$14.20 = EBIT $58.40 $58.40 - Taxes @ 35% -$20.44 -$20.44 = Unlevered net income $37.96 $37.96 + CCA $14.20 $14.20 - Increases in net working capital -$5.00 -$5.00 - Capital expenditure -$142.00 + Continuation value $12.00 = Free Cash flow -$142.00 $47.16 $59.16 Annuity factor @ 12% 1.00000 5.32825 0.32197 Present Values -$142.00 $251.28 $19.05 $128.33 Calculation of NPV of the plant to manufacture lightweight trucks (revenues are 10% lower) (in million dollars) Year 0 Year 1-9 Year 10 NPV Revenues $95.40 $95.40 - Manufacturing expenses -$32.00 -$32.00 - Marketing Expenses -$12.00 -$12.00 - CCA -$14.20 -$14.20 = EBIT $37.20 $37.20 - Taxes @ 35% -$13.02 -$13.02 = Unlevered net income $24.18 $24.18 + CCA $14.20 $14.20 - Increases in net working capital -$5.00 -$5.00 - Capital expenditure -$142.00 + Continuation value $12.00 = Free Cash flow -$142.00 $33.38 $45.38 Annuity factor @ 12% 1.00000 5.32825 0.32197 Present Values -$142.00 $177.86 $14.61 $50.47
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.