23. Bauer Industries is an automobile manufacturer. Management is currently evaluating a proposal to build a plan 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 0| Year 1-9| Year 10|
Revenues| | 100.0| 100.0|
-Manufacturing expenses (other than depreciation)| | -35.0| -35.0| -Marketing expenses| | -10.0| -10.0|
-Depreciation| | -15.0| -15.0|
=EBIT| | 40.0| 40.0|
-Taxes (35%)| | -14.0| -14.0|
=Unlevered net income| | 26.0| 26.0|
+Depreciation| | +15.0| +15.0|
-Increases in net working capital| | -5.0| -5.0|
-Capital expenditures| -150.0| | |
+Continuation value| | | +12.0|
=Free cash flow| -150.0| 36.0| 48.0|

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 PV of the project if revenues are 10% higher than forecast? What is the NPV is 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...

...
Capital Budgeting
QRB/501
July 25, 2013
On this paper the reader will be able to find the rationale in the analysis of a specific capital budgeting case study. Definitions along with explanations related to capital budgeting such as Internal Rate of Return (IRR) and Net Present Value (NPV) will be provided and debriefed. It is extremely relevant to mention that capital budgeting allows the companies to analyze one or more projects to decide eventually which project or piece of equipment would be most profitable or suitable (economically), according to the needs and the capacities the company has.
Before entering into the analysis a little further and into the company chosen let us define what Net Present Value really is. According to Business Dictionary (2011) the definition of NPV is “The difference between the present value of the future cash flows from an investment and the amount of investment. Present value of the expected cash flows is computed by discounting them at the required rate of return.” “NPV is considered as one of the two discounted cash flow techniques, the other one is the Internal Rate of Return”. There are different types of net present values such as the negative net present value (worse return), the positive present value (better return), and the zero net present value that basically means that the original amount is repaid at the rate established. We mentioned earlier...

...Capital Budget Recommendation
Anne Adams
University of Phoenix
Managerial Accounting and Legal Aspects of Business
AC543
Sean DAmico
August 20, 2012
Abstract
This paper will give a comparison between the various preferred capital budgeting evaluation techniques in the corporate business setting. There will be a recommendation given for the Guillermo Furniture Company based on the results of one or more evaluation techniques, which in turn will help direct the financial health of the organization.
Corporations are continually striving to improve the financial health of its organization and one strategic way many corporations are doing that is through capital budgeting. Capital budgeting involves choices. The choices revolve around projects that will add value to the organization. The projects can include acquiring land, purchasing a truck, or replacing old equipment. Many times, corporations are encouraged to undertake projects that will increase its profitability. The challenge is to find the appropriate evaluation method to bring the intended profitability into reality.
The three preferred evaluation methods that many corporations use are net present value, internal rate of return, and payback period. Many corporations often calculate capital budgeting solutions using all three methods. However, each method often produces contradictory results. The net present value method is...

...Capital Budgeting
Part I
PV= FV / (1+i)^y PV= present value, FV= future value, i= discount rate, and y= time.
1a) If the discount rate is 0%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 0% -$400,000
1 $100,000 0% $100,000
2 $120,000 0% $120,000
3 $850,000 0% $850,000
Answer: The projects net present value is $670,000
If the discount rate is 2%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 2% -$400,000
1 $100,000 2% $98,039
2 $120,000 2% $115,340
3 $850,000 2% $800,974
Answer: The projects net present value is $614,353.45
If the discount rate is 6%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 6% -$400,000
1 $100,000 6% $94,340
2 $120,000 6% $106,800
3 $850,000 6% $713,676
Answer: The projects net present value is $514,815.59
If the discount rate is 11%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 11% -$400,000
1 $100,000 11% $90,090
2 $120,000 11% $97,395
3 $850,000 11% $621,513
Answer: The projects net present value is $408,997.46
With a cost of Capital of 5%, what is...

...Week 4 Discussion Question 1b
Introduction
Capital budgeting is one of the most crucial decisions the financial manager of any firm is faced with...Over the years the need for relevant information has inspired several studies that can assist firms to make better decisions. These models are assigned so that they make the best allocation of resources. Early research shows that methods such as payback model was more widely used which is basically just determining the length of time required for the firm to recover the outlay of cash and the return the project will generate. Other models just basically employed the concept of the time value of money. We have seen that more current models are attempting to include their analysis factors that might significantly affect the decision made by the manager (Cooper et.al, 2001).
Recent studies have shown that capital budgeting decisions are highly important and most times complex. There are several reasons associated with the use of capital budgeting. First, capital expenditures require the firms to outlay large sums of funds to initialize the project... Second, firms need to formulate ways that will generate and repay these funds that were initially outlayed. Finally, having a good sense of timing , when using this model is also very critical when making financial decisions. Several alternatives models are commonly used when evaluating capital budgeting...

...
Capital Budgeting
FINC 620 - Financial Management
May 19, 2014
Introduction
According to Investopedia, capital budgeting is the process in which an organization decides whether certain large projects, such as building an addition or purchasing large equipment, are worth the investment (Capital budgeting, 2014). If capital budgeting in not performed prior to a major purchase or beginning a large project, it could be detrimental to an organization. Because of the limited amount of capital that may be available to an organization at any given time, it is critical that company leaders utilize capital budgeting methods to make the determination which ventures will bring the company the biggest return on their investment. Among these capital budget methods are Payback Period, Net Present Value (NPV), and Internal Rate of Return (IRR).
Payback Period
According to Marty Schmidt, the payback period is the cash flow analysis metric that calculates the length of time for capital acquisitions or investments to pay for themselves, the length of time it takes to cover costs, or what is the investment breakeven point (Schmidt, 2014). The payback period is quite an easy financial metric, and is equal to the organization’s required investment, divided by its net annual cash inflow....

...Question a
What is capital budgeting? Are there any similarities between a firm’s capital budgeting decisions and an individual’s investment decisions?
Capital budgeting is the process of analyzing potential additions to fixed assets. Capital budgeting is very important to firm’s future because of the fixed asset investment decisions chart a company’s course for the future. The firm’s capital budgeting process is very much same as those of individual’s investment decisions. There are some steps involved. First, estimate the cash flows such as interest and maturity value or dividends in the case of bonds and stocks, operating cash flows in the case of capital projects. Second is to assess the riskiness of the cash flows. Next, determine the appropriate discount rate, based on the riskiness of the cash flows and the general level of interest rates. This is called project’s required rate of return or cost of capital in capital budgeting. Then, find the PV of expected cash flows and the asset’s rate of return. If the PV of the inflows is greater than PV of outflows (NPV is positive), or if the calculated rate of return (IRR) is higher than the project cost of capital, accept the project.
Question b
What is the difference between independent and mutually exclusive projects? Between normal and non-normal projects?
Independent projects mean a...

...
Capital Budgeting Analysis Project
MBA 612
The General Capital Budgeting Process and how it is implemented within Organizations
The general capital budgeting process is the tool by which an organization determines its choice of investments through analyzing and evaluating its cash in and out flows. The capital budget process is vital to the organizations mere existence. Capital budgeting decisions can mean the difference between the company’s survival and its extinction, especially in today’s volatile global economic environment. The goal of survival for an organization is to create the maximum amount of shareholder wealth. To achieve positive shareholder wealth, the organization must maximize its share price through creating a positive net present value. The organization cannot achieve shareholder wealth without the use and understanding of a solid capital budget process (Megginson, Smart, Graham, 2010).
Capital budgeting analysis is really a test to see if the benefits (cash inflows) are large enough to repay the company for three things the cost of the asset, the cost of financing the asset (interest) and a rate of return (Investopedia, n.d.).
The capital budget process involves three basic steps:
1) Identifying potential investments. This is the “idea” phase. Ideas...

...undertake (capital budgeting) and how will investment and finance decisions affect the firm's value (valuation)?
How can cash be raised for the required investments? This is known as the financing decision' (cost of capital, capital structure and leasing).
How will the firm manage its day-to-day cash and financial affairs (short-term financing and net working capital)?
The Capital Budgeting Mini Case presents a financial decision of acquiring another corporation. Two choices are available; Corporation A and Corporation B, the cost of each choice is $250,000, and acquiring both corporations is not an option. The primary goal of any company is to create value for its shareholders and as such, the most important job of the financial manager is to create value from the company's capital budgeting,
Financial managers must be particularly aware of the timing of cash flows (the time value of money') and associated risks. This financial decision-maker will use projected cash flows to determine whether acquiring Corporation A or Corporation B (i.e. NPV and IRR) is the best choice. If acquisition does not generate positive cash flow, the company is effectively providing finance for the acquired corporation.
Capital Budgeting Decisions
Many business opportunities involve sacrificing current earnings for future profits (opportunity cost). For the acquisition to be...