Bauer_Industries - 1 Bauer Industries Lance Garner...

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1 Bauer Industries Lance Garner Professor Chieng Strayer University July 20, 2011
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Problem 23 Berk and DeMarzo, introduces Bauer Industries as 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): Table 1 The net present value (NPV) decision rule is the difference between the present value of a project or investment’s benefits and the present value of its costs. When making an investment decision, take the alternative with the highest NPV. Choosing this alternative is equivalent to receiving NPV in cash today (Berk & DeMarzo, 2011). The net present value of the plant to manufacture light weight trucks can be calculated by using the formula in Figure 1, where PV represents present value, FCF demonstrates futre cash flow, r equals rate and t is year discount factor. Figure 1
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This note was uploaded on 08/27/2011 for the course FIN 3332 taught by Professor Kevin during the Spring '00 term at Armstrong State University.

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Bauer_Industries - 1 Bauer Industries Lance Garner...

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