Butch T. Automotive, Inc. (henceforth Butch Auto or the company) is an American automotive retailer located in Pullman, WA. The companys president, Jack Reacher, founded Butch Auto almost 20 years ago, in 2003. When the company was first founded, it focused on producing high- end batteries for automobile manufacturers. The company continues to manufacture these batteries today, part of its core business practices, which account for about 50% of its total revenue. Noticing a shift in the automotive market, the company recently expanded into the business of manufacturing its own fully electric vehicles. You and your team, the Carson College of Business graduates, are hired by the companys finance department to evaluate a new project for the company. As of now, Butch Autos only fully electric car model is a midsize SUV called the Model-Coug (henceforth Model-C), and sales have not been excellent. Butch Autos main competitor in the electric car market is Tesla, Inc (TSLA). Butch Autos Model-C is like the Tesla Model X, but it has a shorter driving range and worse performance in safety tests. However, Butch Auto wants to incorporate a new luxury vehicle, the Model-CougXX (henceforth Model-CXX) into their lineup. Butch Auto spent $2 million to develop new features and luxury technology, like quicker acceleration, multi-day driving range, and a hyper-sport mode, which were all incorporated in the new Model-CXX design, making it more high-end and desirable than the current Model-C. The company spent an additional $1.1 million on a marketing research study to determine the new cars expected sales figures. Butch Auto can manufacture the new vehicle, Model-CXX, for $60,000 per unit in variable costs. Fixed costs for the operation are estimated to run $55 million per year. The estimated sales volumes (in units) are 17,000, 12,000, and 9,000 vehicles per year for the next three years, respectively. The unit price (per vehicle) of the new car, Model-CXX, will be $68,000. The necessary equipment can be purchased for $35 million and will be depreciated on a five-year MACRS schedule. It is believed the market value of the equipment in three years will be $1.5 million. As previously stated, Butch Auto currently manufactures the Model-C. Due to poor sales, production of the existing product is expected to be terminated in two years. If Butch Auto does not introduce the new Model-CXX vehicle, sales of the existing product will be 10,000 and 9,000 units per year for the next two years, respectively. The price of the current vehicle, Model-C, is $40,000 per unit/car, with variable costs of $35,000 each and fixed costs of $30 million per year. If Butch Auto does introduce the new Model-CXX vehicle, sales of the existing automobile will fall by 5,000 units per year, and the price of the existing automobile, the Model-C, will have to be lowered to $36,000 per vehicle. Net working capital for the new project will be 1% of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in Year 1 with the first years sales. Butch Auto has a 20% corporate tax rate. The company has a target debt to equity ratio of 0.5 and is currently A rated (according to S&P 500 ratings). The overall cost of capital for Butch Auto is 10% The finance department of the company has asked you to prepare a report to Jack, the companys CEO, and the report should answer the following questions.

QUESTIONS 1. Can you prepare the income statement and the total cash flow (CFFA) table for this new project? 2. Please use these tables to help explain to Jack the relevant and irrelevant cash flows of this project? 3. The companys CEO, Jack, wants to understand the risk of the electric vehicle industry better. Since Butch Autos main competitor, Tesla, Inc (TSLA), is a leading company in this industry, Jack asks you to perform the following analysis on TSLA. a. Using the past N years of data (ending in 2022), estimate your own beta and alpha of TSLA based on a regression analysis. Document the data sources used. Also, explain how long a period (from which year to which year) you decide to use to perform your estimation, and explain why? b. Provide your beta and alpha estimates, as well as the statistical significance (e.g., t ratio, or p-value). Comment briefly. c. Plot the security characteristic line for this company, and clearly show alpha and beta on the diagram. Is the company correctly priced, overpriced, or underpriced? d. From the above analysis, can you explain to Jack the risk characteristics of TSLA and the electric vehicle industry using the beta you estimated? Do you think your estimated beta makes sense given the nature of the company and the industry? 4. Given your understanding of Butch Auto and your analyses so far, can you help Jack to make the project decision regarding the companys new product, Model-CXX? That is, please compute the NPV and IRR of Butch Autos new project. Please show your computation steps clearly (show your inputs if using financial calculator or excel sheet). Should Jack take the new project? Why or why not (Please explain using the NPV and IRR rules separately)?