Because of increased consumer demand for fuel-efficient, alternative-energy automobiles, Global Auto Company is considering investing in a new hybrid crossover vehicle. Development costs each year for a 2-year period for this new vehicle are estimated as $750 million. Tooling and other setup costs in year 2 are estimated at $1 billion. Actual production and sales are estimated to begin in year 3. It is anticipated that the plant being envisioned could produce vehicles for 6 years. Each vehicle sold is estimated to provide $3,500 of net cash flow (pretax). The estimated salvage value of the manufacturing plant after 6 years of operation is thought to be $250 million. Assume that all cash flows take place at year-end and that the pretax WACC (discount rate) for Global Auto is 15%. Income tax effects can be ignored in this problem.

Part 1 (Static)

Required:

1. What minimum volume of car sales (per year, in the 6-year life of the plant) is needed to make this proposed investment acceptable using NPV as the decision criterion? (Note: For calculating present values of after-tax cash flows, use the following formula rather than the PV factors presented in Table 1 in Appendix C: PV_i = 1 / (1 + r)ⁱ, where r = discount rate (WACC) and i (year) = 18. Also, use the Goal Seek function in Excel to answer this question.) (Round your answer to the nearest whole number.)

2. How does your answer in requirement 1 change if the companys pretax WACC is 16%? 14%? Do you think the estimated NPV of this project is sensitive to the estimate of the companys discount rate? (Round your answers to the nearest whole number.)