1. The CEO of Tesla, Elon Musk, is responsible for evaluating potential projects and financial decisions. Assume that the discount rate is 20%. Tesla is considering a short-term project that develops new electric vehicle designs (Project 1). This project has a cost of $72M today and will generate $108M next year. Explain the timeline for this project.

Year (Cash Flow): 0(-$72M)_______________1($108M)

2. What is the NPV of project 1? Following the NPV rule, Should Musk accept this project?

NPV = (-72/1.2^0)+(108/(1.2^1))=18

The NPV is 18>0

Yes, Musk should accept this project because the NPV (18) is positive

3. What is the internal rate of return (IRR) for Project 1? Based on the IRR rule, should Musk accept this project? Does the IRR rule give the same answer as the NPV rule?

NPV = (-72/(1+IRR)^0)+(108/((1+IRR)^1)) = 0

IRR = .5 or 50%

Yes, Musk should accept this project because the IRR (50%) is greater than the discount rate

(20%)

Yes, the IRR rule gives the same answer as the NPV rule 4. Musk is also considering a long-term R&D project on rechargeable batteries (Project 2). The cost of this project is $72M today. The project will generate $18M in the first year and this cash flow is expected to grow by 2% each year forever. What is the NPV of this project? Should Musk accept this project?

NPV= 18*(1+0.02)/(0.20-0.02)-72

NPV= (18*(1.02)/(0.18))-72

NPV=102-72=30

The NPV is 30>0

Yes, Musk should accept this project because the NPV (30) is positive

5. What is the internal rate of return (IRR) for Project 2? Based on the IRR rule should Musk accept this project? Does the IRR rule give the same answer as the NPV rule?

????????????????????? 6. Projects 1 and 2 are mutually exclusive and Musk needs to choose only one project. He believes that the project with the higher IRR should be chosen. In this case, what project would Musk choose? Is this the correct decision? Explain why ????????????????????? 7. Assume that Musk is the only shareholder of Tesla. He decided to choose Project 1 (instead of project 2) because he personally needs $100M next year. Is this the correct decision? Explain why

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