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1. Incremental Cash Flows. Tesla's product line current consists of the Model S sedan. Tesla is deciding whether to introduce the Model X SUV. If
1. Incremental Cash Flows. Tesla's product line current consists of the Model S sedan. Tesla is deciding whether to introduce the Model X SUV. If Tesla does introduce the Model X, it will sell 10,000 Model X annually in years 1-10 and 15,000 Model S annually in years 1-10. However, if Tesla does not introduce the Model X, it will sell 20,000 Model S annually in years 1-10. Moreover, Tesla can use its existing plant and equipment to produce the Model S. To manufacture the Model X. Tesla must spend $500 million in plants and equipment in vear 0 which will be depreciated straight line to a book value of S0 in years 1-10 (i.e depreciation is S50 million per year in years 1-10). Each Model X will sell for $80,000 and cost $70,000 to produce. Each Model S will sell for $60,000 and cost $55,000 to produce. Assume that the corporate tax rate is 35%, and that the appropriate nominal discount rate is 8.0% per year (a) What are Tesla's after-tax cash flows in years 0-10 if it does not introduce the Model X to its product line? (b) What are Tesla's after-tax cash flows in years 0-10 if it does introduce the Model X to its product line? (c) What are Tesla's incremental after-tax cash flows in years 0-10 if it does introduce the Model X to its product line? (Hint: Subtract Tesla's after- tax cash flows in years 0-10 without the Model X from Telsa's after-tax cash flows in years 0-10 with the Model X.) (d) What is the NPV of the incremental after-tax cash flows that you calcu- lated in part (c)? Should Tesla introduce the Model X or not
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