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Capital Budgeting: Cash flow projections of Bauer Industries - Math Problem Example
The free cash flow projections of Bauer Industries for the next ten years period are analyzed in this work. Based on the cash flows, the NPV of the Bauer Industries’ plant to construct lightweight trucks will be the summation of the present values of all the cash flows from year 1 to year 10 discounted back appropriately by the Cost of Capital 12% minus the Capital Expenditure made in the Year 0. …
Since the management of Bauer is not certain about the forecast of revenue in the coming years, they plan to check the NPV’s sensitivity to revenue variations. They consider two cases, one: where the revenues are 10% higher than the given revenue forecast and two: where the revenues are 10% lower than the mentioned revenue forecast.
Case 1) When the revenues are 10% higher than the forecast, then the
Free Cash flows are 42.5 42.5 42.5 42.5 42.5 42.5 42.5 42.5 42.5 54.5
Present Values are 37.95 33.9 30.3 27 24.12 21.53 19.2 17.2 15.33 17.55
Thus, the project’s NPV, when the flow of revenue increases by 10%, would be 94. ...