Capital Budgeting Project: Ford$$s Transition to Electric Vehicle Manufacturing

The transition to sustainable energy and eco$-$friendly alternatives is not just an environmental imperative; it is fast becoming a commercial necessity for businesses worldwide. The automotive industry, traditionally associated with fossil fuels and substantial carbon emissions, finds itself at the forefront of this shift. As climate change and environmental concerns gain prominence, companies are driven both by regulatory mandates and growing consumer demand to adopt green technologies and sustainable practices.

This project, titled $$Capital Budgeting Project: Ford$$s Transition to Electric Vehicle Manufacturing$$ delves into the financial, operational, and strategic implications of such a significant transition for Ford, one of the world$$s leading automotive companies.

At the end of the year $2022($which also marks the end of the fiscal year $2022),$ let$$s assume that Ford has not yet begun producing EVs but is considering the shift to EVs. For the sake of simplicity, we$$ll assume that Ford is only considering entry into the U$.$S$.$ EV market. In order to evaluate this project, please consider the following assumptions provided.

Key Assumptions

Sales and Revenue: If the project is implemented, assume Ford will begin significant EV production and delivery after $2$ years, accounting for the time needed for R&D$,$ constructing production facilities, establishing supply chain partnerships, etc. Start by estimating the evolution of the entire U$.$S$.$ EV market beginning in $2025.$ Available data provides the forecasted total annual number of EVs projected to be sold in the U$.$S$.$ through the year $2028($refer to the following graph$).$ Assume the entire U$.$S$.$ EV market will continue to expand at the average growth rate observed from $2025$ to $2028$ until $2035.$ Afterward, expect a slight slowdown in the EV market, with the annual growth rate dropping to half of the prior rate. Assume this reduced rate will continue through $2045.$

Electric Vehicles $-$ Vehicle SalesFord$$s management believes that in its first year of significant EV production, the company will secure $5\%$ of the total U$.$S$.$ EV market share. Over the following five years, this share is expected to steadily rise $($equivalent annual percentage increase$)$ to $30\%.$ This projection takes into account Ford$$s established brand strength and existing market reach. After this period, we assume Ford$$s market share will remain consistent.

Considering Ford$$s historical market positioning as a more affordable option compared to Tesla, it is assumed that the average selling price of a Ford$-$produced EV will be $$45,000,$ in contrast to Tesla$$s average selling price of $$55,000.$

Cost of Goods Sold $($COGS$)$: Assume that COGS for Ford$$s EVs will amount to $75\%$ of the revenue generated from the EV segment. This estimation takes into account potential efficiencies derived from Ford$$s current manufacturing processes.

R&D Expenses: Given Tesla$$s pioneering role in technological advancements, Ford might benefit from existing innovations. Assume that for the first $6$ years, the R&D expenses for the EV business will be $20\%$ of its total R&D expenses in $2022.$ Subsequent to this period, it is projected that Ford will allocate $5\%$ of its anticipated EV$-$related revenue to R&D$.$

Capital Expenditures $($CapEx$)$: Constructing new manufacturing lines and upgrading existing ones for EV production will necessitate an initial capital expenditure equal to $10\%$ of Ford$$s Net Property, Plant, and Equipment $($PPE$)$ at the end of fiscal year $2022.$ After the first year, the project will require an additional investment identical to the initial capital expenditure. After the second year, as signigicant EV production commences, the project will demand an investment amounting to $20\%$ of the initial capital expenditure. This will cater to the maintenance, expansion, and upgrade of the EV production lines. For subsequent years, the annual investment will remain stable. A straight$-$line depreciation can be applied to the annual capital expenditure over a $5-$year period.

Other Selling, General, and Administrative Expenses $($Other SG&A$)$: Transitioning to EV manufacturing involves not just technical and operational changes, but also adjustments to Ford$$s sales and marketing strategy, administrative operations, and broader management practices. These changes will have implications for Ford$$s other SG&A expenses, such as marketing expenses, dealer training & upgrades, administrative costs, and green certification costs. In the initial $4$ years, as Ford enters the EV market, it will launch an aggressive marketing and advertising push to establish its position in the EV segment. Costs associated with dealer training and upgrades are also expected to surge during this early stage of Ford$$s entry into the EV market. Therefore, we assume that for the first $4$ years, Ford$$s spending on EV$-$related SG&A expenses will be $12\%$ of its other SG&A expenses from $2022.$ Subsequently,