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. Case 2) When the revenues are 10% lower than the forecast, then the Free Cash flow are 29.5 29.5 29.5 29.5 29.5 29.5 29.5 29.5 29.5 41.5 Present Values are 26.3 23.5 21 18.7 16.739 14.9 13.3 11.9 10.6 13.4 Thus, the project’s NPV, when the revenue flow decreases by 10 %, is 21. Problem 23 c) The management of Bauer does not want to assume that the cash flows for the project in the coming years would be stable. They want to check the sensitivity of the NPV of the project to possible growth in the revenue as well as operating expenses. They assume that the revenues, manufacturing expenses and the marketing expenses remain constant in year 1 but increase by 2% per year starting from the 2nd year. They plan to assume that the capital expenditure made initially, the depreciation, working capital additions and the value of continuation

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are the same as mentioned initially in the table. The values of the Free Cash Flows change with the growth in the revenue and the operating expenses. They are as follows: 36.00 36.72 37.44 38.19 38.95 39.72 40.51 41.32 42.14 54.97 The present values of the same are 32.14 29.27 26.65 24.27 22.10 20.12 18.32 16.69 15.19 17.70 The project’s NPV will be 72.46. If they consider the growth rate of revenue, marketing expenses and the manufacturing expenses to be 5% instead of 2%, the free cash flows available would be as follows: 36.00 40.29 45.09 50.48 56.50 63.25 70.81 79.28 88.77 111.39 The present values of the same would be: 32.14 32.12 32.10 32.08 32.06 32.05 32.03 32.02 32.01 35.86 The project’s NPV hence calculated would be 174.47. Thus, it can be seen that as the growth rate of revenue, manufacturing and marketing expense is changed from 2% to 5%, the NPV of the same project increases by around 102. Problem 23 d) The management of Bauer Industries wants to observe the sensitivity related to the NPV of the project with reference to the discount rate which is the cost of capital for the