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##### Bauer Industries is an automobile manufacturer. Management

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Question;Bauer Industries is an automobile manufacturer. Management;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 Years 1;Year 10;0 -9 10;Revenues;100.0 100.0;Manufacturing expenses (other than depreciation) -35;-35;Marketing expenses;-10 -10;Depreciation -15 -15;=EBIT 40 40;-Taxes (35%) -14 -14;= Unlevered Net Income;26 26;+Depreciation +15 +15;-Increases in net working capital -5 -5;-Capital Expenditures;-150;+Continuation value;+12;=Free Cash Flow;-150 36 48;? a. For this;base-case scenario, what is the NPV of the plant to manufacture lightweight;trucks?;? b. 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?;? c. Rather;than assuming that cash flows for this project are constant, management would;like to explore the sensitivity of its 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 2% per year every year starting in year 2.;Management also plans to assume that the initial capital expenditures (and;therefore depreciation), 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 5% per year rather than by 2%?;? 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 the 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?;20.;You are considering making a movie. The movie is expected to;cost $10 million upfront and take a year to make. After that, it is expected to;make $5 million when it is released in one year and $2 million per year for the;following four years. What is the payback period of this investment? If you;require a payback period of two years, will you make the movie? Does the movie;have positive NPV if the cost of capital is 10%?;Choosing Between Projects;21.;You are deciding between two mutually exclusive investment;opportunities. Both require the same initial investment of $10 million.;Investment A will generate $2 million per year (starting at the end of the;first year) in perpetuity. Investment B will generate $1.5 million at the end;of the first year and its revenues will grow at 2% per year for every year;after that.;a.;Which investment has the higher IRR?;b.;Which investment has the higher NPV when the cost of capital;is 7%?;c.;In this case, for what values of the cost of capital does;picking the higher IRR give the correct answer as to which investment is the;best opportunity?;Pisa Pizza, a seller of frozen pizza, is considering;introducing a healthier version of its pizza that will be low in cholesterol;and contain no trans fats. The firm expects that sales of the new pizza will be;$20 million per year. While many of these sales will be to new customers, Pisa;Pizza estimates that 40% will come from customers who switch to the new;healthier pizza instead of buying the original version.;a.;Assume customers will spend the same amount on either;version. What level of incremental sales is associated with introducing the new;pizza?;b.;Suppose that 50% of the customers who will switch from Pisa;Pizza?s original pizza to its healthier pizza will switch to another brand if;Pisa Pizza does not introduce a healthier pizza. What level of incremental;sales is associated with introducing the new pizza in this case?

Paper#42189 | Written in 18-Jul-2015

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