Case title: Project Evaluation for the Apple Car Investment

Background: You are a financial analyst tasked with evaluating the feasibility of Apple's proposed

venture into the electric vehicle $($EV$)$ market, often referred to as the "Apple Car" project. Apple

is considering a significant investment in developing and manufacturing its electric car. Your

assignment is to conduct a capital budgeting analysis to determine whether this investment is

financially viable.

Apple has been talking about making its own self$-$driving autonomous vehicle for a while. Tim

Cook believes that entering the EV market aligns with its long$-$term strategy and can be a

significant growth opportunity. The company has allocated $$10$ billion for initial research and

development $($R&D$)$ and plans to continuously invest into this project over the next five years to

bring the Apple Car to market. The project is expected to have a useful life of ten years.

Project Details:

$$ Introductory Costs: If Apple decides to go ahead with the Apple Car investment, it will have

to spend $$22$ billion up front $($right now$)$ to lock in suppliers, distributors, and retailers and to

invest in infrastructure. The cost is depreciable over the next $10$ years, down to a salvage value

of $ $2$ billion, and Apple expects to use straight$-$line depreciation.

$$ Market Potential: Apple is targeting the premium auto market $($including all cars priced at or

above $$60,000)$ and expects to sell $100,000$ units in year $1.$ Apple anticipate the unit sale will

increase by $10\%$ each year from year $2$ to year $10.$

$$ Price and unit cost: Apple expects to price the car at $$75,000$ next year and the price will keep

pace with the inflation rate of $3\%$ after that. The costs of Apple Car production are $$40,000$ per

unit next year. The cost of production will grow at the inflation rate $(3\%)$ thereafter.

$$ Operating Expenses: the operating expenses including production and marketing will be $$5$

million in year $1,$ and such cost will increase with the inflation rate after that. Additional R&D

investments of $$400$ million per year from years $1$ to $5$ will be allocated to the Apple Car project

as well. There is no more R&D investment from year $6.$

$$ Working Capital Requirements: The Apple Car will create working capital needs, which you

have estimated as follows:

o The sale of Apple Car to retailers will create accounts receivable amounting to $5\%$ of

revenues each year.

o Inventory will be approximately $10\%$ of the production cost.

o Accounts payable will be $6\%$ of the revenues.

o All these working capital investments will have to be made at the beginning of each

year in which goods are sold. Thus, the working capital investment for the first year

will have to be made at the beginning of the first year $($right now$).$

$$ Cost of capital: Apple$$s cost of capital is $9\%.$

Task:

$1.$ Estimate the projected cash flows associated with Apple Car in the next $10$ years.

$2.$ Calculate the net present value $($NPV$)$ and internal rate of return $($IRR$)$ for the Apple Car

project and determine if Apple should accept and continue with this project.

$3.$ Conduct a sensitivity analysis to assess the project sensitivity to changes to assumptions

such as forecasted revenue, cost, expenses, and cost of capital.

$4.$ What are the other factors that would affect your decision?