Case 2 (50 marks) Honda to collaborate with GM on self-driving service in Japan1 (The Japan Times, 20 Jan 2021) Honda Motor Co. said Wednesday it will collaborate with General Motors Co. and its unit Cruise LLC on launching a service using self-driving vehicles in Japan and start feasibility tests later this year. Automakers are scrambling to develop next-generation autonomous vehicles, with IT firms also joining the race. Honda and major U.S. carmaker GM agreed in 2018 to join hands in developing self-driving vehicles. Honda said it plans to start a mobility business using the Cruise Origin, a self-driving vehicle being developed by the three companies, with an eye to offering new transportation solutions in potential collaboration with local governments in Japan.......... Honda and Cruise will start conducting experiments in Japan using Cruises test vehicle this year, Honda said. Cruise and GM said Tuesday they would partner with Microsoft Corp. to accelerate the commercialization of driverless vehicles. Tesla, Samsung Expected to Partner on Self-Driving 5nm Chip2 (EnterpriseAI News, 28 Jan 2021) Samsung Electronics is said to be partnering with electric vehicle leader Tesla on a leading-edge 5-nanometer chip design that would serve as the core of an emerging self-driving car capability........ A partnership with Tesla would allow Samsung to ramp production of bleeding-edge 5nm chips based on its extreme ultraviolet process technology, boosting wafer yields as fabrication scales........ The advanced chips would reportedly support Teslas 4D sensing capabilities underpinning its autopilot and full self-driving (FSD) sensor suite. Among the components is a millimeter-wave radar. According to Electrek.com, Tesla recently filed an application with the U.S. Federal Communications Commission to use the new radar in future versions of its electric vehicles........ Those self-driving features would require predictive analytics and inference capabilities that would presumably be handled by the new Samsung processor. The 5-nm device would also manage a range of vehicle components, including displays and memory. Similarly, the additional performance gains would support future 6G wireless networks that, among other capabilities, would allow vehicle-to-vehicle and roadside communications. 1 Source: https://www.japantimes.co.jpews/2021/01/20/business/honda-gm-self-driving/ 2 Source: https://www.enterpriseai.news/2021/01/28/tesla-samsung-expected-to-partner-on-self- driving-chip/

Question 1 (30 marks) As discussed above, the car making companies are aggressively considering further development of self-driving vehicles. Suppose the car making companies have the following two mutually exclusive development plan, Plan A and Plan B. The financial managers have prepared estimates of the initial investment, evaluation of the two possibilities produces the following cash flows and internal rates of return (IRR), they are shown in the table below. The financial managers believe that the two plans carry similar risks and the acceptance of either of them will not change the groups overall risk. Suppose the companies requires a return of 14% on the development plans.

1. Which project will you recommend by applying the internal rates of return (IRR) criterion? Why?

2. Apply the Net Present Value (NPV) method to determine which plan should be adopted. Explain.

3. Apply the payback criterion to determine which plan should be adopted if the companies impose a payback cutoff of 3 years. Explain.

4. Apply the Profitability Index (PI) criterion to determine which plan should be adopted. Explain.

5. Based on your answers in parts (i) through (iv), which plan will you finally recommend? Why?

Year Plan A (US$ in thousand) (54,000) 12,700 Plan B (US$ in thousand) (23,000) 11,600 0 1 2 23,200 11,200 3 27,600 12,500 4 46,500 6,000 IRR 28.5% 30.94%