Assignment 2

Capital Budgeting

Vicki Rose

Strayer University

Dr. Karaffa

FIN 534

April 29, 2011

Capital Budgeting

This paper will discuss Chapter 7 problem 23. The paper will show how to calculate the problem. The paper will also summarize the problem.

Problem 23

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 the project. Based on extensive research, it has prepared the following incremental free cash flow projections (in millions of dollars):

|  |Year 0 |Years 1-9 |Year 10 |

|Revenues | |100 |100 |

|- Manufacturing Expenses | | | |

|(other than Depreciation) | |-35 |-35 |

|-Marketing expenses | |-10 |-10 |

|-Depreciation |  |-15 |-15 |

|= EBIT |  |40 |40 |

|-Taxes 35% |  |-14 |-14 |

|= Unlevered in net working capital | |26 |26 |

|+Depreciation | |15 |15 |

|-Increases in net working capital | |-5 |-5 |

|-Increases in net working capital | | | |

|-Capital Expenditures |-150 | | |

|+ Continuation Value | ...