Assume Toyota is planning to construct a new assembly line to produce a hydrogen-fueled car (called a Hydro) for sale in New Zealand: 

- Construction of the assembly line and testing and storage facilities for the new Hydro car project will cost $350 million with a 6-year production run. The land site for the project would alternatively be sold now for $35 million. 

- The company will receive a $60 million Federal Government up-front subsidy if it goes ahead with the new car project. 

- Installation costs and employee training will cost $20 million and $50 million will be required for back-up working capital to support the operation of the assembly line and testing facility. 

- The sale price of each Hydro car will be $20,000 and raw material components are $7,000 per car. 

- Staffing, fixed overhead and operating, and distribution costs will be $150 million per year. 

- Details of the expected cash flows of the project: 

• Sales are expected to be 12,500 Hydro cars in year1, 16,000 cars in year 2, 20,000 cars in year 3, 25,000 cars in year 4 and 30,000 cars in year 5 and 6. 

• The new model will reduce annual sales of the firm’s existing Toyota Prius Hybrid model (Variable margin = $18,000) by 3,500 units in year1 and by 2,000 units in year 2. MACRS depreciation is applied to the project based on the 5-year asset class specification. The assembly line facility can be sold for $120 million at the end of 6 years and initial working capital investment will be recouped in year 6. 

• The company faces a 30% tax rate on its Australian earnings and its after-tax cost of capital is 11%.

a. What initial investment is required in this project?

b. Calculate the depreciation value in each year.

c. Compute the annual net cash flows associated with this project.

d. Compute the terminal value associated with this project.

e. Calculate the net present value of the project.

f. Calculate the Internal Rate of Return of the project.

g. Calculate the profitability Index of the project.

h. Compute the payback period of the project.

i. Based on the outcomes, will you accept the project?