Financial Management 534
Assessment 2 Professor: Dr. Liu By: Terri L. Randall
The 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). A. What is the NPV of the plant to manufacture?
B. What is the NPV of the project at 10% higher than forecast, and what if the NPV was 10% lower? C. What is the NPV with all of the above, and how does the NPV change if the cost grows by 5% rather than 2%? The Bauer industries’, NPV from research was found to be 57.271771 for revenues and expenses. At 10% higher the companies NPV for revenue and expenses would be 93.99816. At 10% lower the NPV would be 20.54526. With the growth at 2% the NPV would be 72.46336, and by using 5% the NPV would be 94.27738. This suggests that the company could carry out all future plans of manufacturing lightweight trucks. The Bauer company could use the 12% cost of capital and they could survive any problems that they may foresee, because there seems to be a risk factor in place to allow them to collect on any loses. (Place the chart you made on excel here)
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