Finance Solution based on NPV:

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 0

Year 1-9

Year 10

100.0

100.0

(other than depreciation)

-35.0

-35.0

-Marketing expenses

-10.0

-10.0

-Depreciation

-15.0

-15.0

Revenues
-Manufacturing expenses

= EBIT

40.0

-Taxes (35%)

40.0
-14.0

= Unlevered net income

26.0

-14.0
26.0

+ Depreciation

+15.0

+15.0

-Increases in net working capital

-5.0

-5.0

-Capital expenditures

-150.0

+Continuation value
=Free Cash Flow

+12.0
-150.0

36.0

48.0

For this base-case scenario, what is the NPV of the plant to manufacture lightweight trucks?

Solution:
Year 0
Sales revenue

Year 1

Year 2

Year 3

Year 4

100.00

100.00 100.00 100.00 100.00

Year 5

Manufacturing expenses other than

depreciation

35.00

35.00

35.00

35.00

35.00

Marketing expenses

10.00

10.00

10.00

10.00

10.00

Depreciation

15.00

15.00

15.00

15.00

15.00

$40.00 $40.00 $40.00

$40.00

Equals net operating income

$40.00

Minus income tax

14.00

Equals Unlevered Net income

$26.00

14.00

14.00

14.00

14.00

$26.00 $26.00 $26.00

$26.00

Plus depreciation

15.00

15.00

15.00

15.00

15.00

Additions to net working capital

(5.00)

(5.00)

(5.00)

(5.00)

(5.00)

$36.00 $36.00 $36.00

$36.00

Capital Expenditures

(150.00)

Continuation value
Free cash flow

($150.00)

Year 6

$36.00

Year 7

Year 8

Year 9

Year 10

100.00

100.00

100.00

100.00

100.00

35.00

35.00

35.00

35.00

35.00

10.00

10.00

10.00

10.00

10.00

15.00

15.00

15.00

15.00

15.00

$40.00

$40.00

$40.00

$40.00

$40.00

14.00

14.00

14.00

14.00

14.00

$26.00

$26.00

$26.00

$26.00

$26.00

15.00

15.00

15.00

15.00

15.00

(5.00)

(5.00)

(5.00)

(5.00)

(5.00)

12.00

NPV = -150 + 36 (PVIFA)@12%, 9 +

48/1.1210

$36.00

$36.00

NPV = -150 + 36*5.3282 + 48*0.3220

NPV = $57.3 million

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$36.00

$36.00

$48.00