Case Study:

Motorworks, Inc., a manufacturer of small, budget cars and pickup trucks for the Upper Midwest market, is considering a new vehicle line. They must choose between either a new line of car or pickup truck (they cant do both). Using the data below, your assignment is to determine which product line should be introduced.

Project Information common to each possible choice:

The factory for either product line would be built on a large tract of land just west of Grand Ledge that the company bought in 2012 in anticipation of needing an additional factory someday. They paid $2,000,000 for the land.

The company has received a firm offer of $4,000,000 from DeWitt Aerospace, Inc. for the land referenced above that the company would receive if it does not build a factory on it.

The company spent $400,000 on a marketing study last year to determine how many cars from the proposed product line it would be able to sell.

Two years ago, the company spent $600,000 to determine the consumer appetite for a new line of trucks in the upper Midwest market.

If the factory will be built, the company will need to spend $1,000,000 to improve roads and the general infrastructure around the factory.

The company wants to evaluate both potential projects on a 5-year basis.

The entire amount of the initial investment will be depreciated to zero over the 5 years of the project.

The companys marginal tax rate is 30%

The required rate of return for each project is 11%

Part A

Using the common data above and the data specific to each product line below, determine the NPV for both the new car and new truck line.

Car Line:

Additional Data:

The company expects to sell 5,000 cars in Year 1 at a price of $10,000 each. Sales are expected to grow by 5% each year throughout the project, though the sales price of the cars will remain constant.

Total costs are expected to be 80% of Sales Revenue

The factory and all necessary equipment will cost $25,000,000

Net Working Capital charge in Year 0 will be $6,000,000. The company expects to recover 40% of this in the terminal year (Year 5).

Truck Line:

Additional Data:

The company expects to sell 7,000 trucks in Year 1 at a price of $20,000 each. Sales are expected to grow by 6% each year throughout the project, though the sales price of the trucks will remain constant.

Total costs are expected to be 85% of Sales Revenue

The factory and all necessary equipment will cost $61,000,000

Net Working Capital charge in Year 0 will be $11,700,000. The company expects to recover 40% of this in the terminal year (Year 5).

Your completed assignment should show the NPV for each product line.