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Company Background Middle River Automotive, LLC (MRA) is a company that was established in 2017 with the goal of designing, developing, manufacturing, and selling
Company Background Middle River Automotive, LLC (MRA) is a company that was established in 2017 with the goal of designing, developing, manufacturing, and selling both hybrid and fully electric cars and light trucks. The company's corporate and design headquarters are in Baltimore, MD. In 2018, the company acquired several decommissioned assembly plants in nearby Middle River, MD, previously owned by Martin Marietta, Corp., an aerospace manufacturing company later acquired by Lockheed Martin. MRA has spent the past 18 months renovating and updating these facilities in anticipation of using them to manufacture electric vehicles. The cost of these renovations thus far has been approximately $1 billion. Scenario It is 2022 and MRA management is currently evaluating a proposal to move forward with plans to manufacture its first light pickup truck, the fully electric Pegasus EVX. The company has already conducted extensive research into both the manufacturing and marketing of this new vehicle and has developed the following estimates: The company expects that, upon the commencement of production, this new project will have an 8-year life. If the project moves forward, a further $250 million investment in Property, Plant, & n Equipment will be required immediately. This capital expenditure will be fully depreciated using the straight-line method over an 8-year depreciable life. Syear Straight the deprecation If given the green light, it will take one year to finish preparing the manufacturing facility, install the new equipment, and hire and train employees. Production and deliveries will commence during year 2 and run for 8 total years. Though operations will not have commenced in Year 1, the company will begin to recognize any depreciation expense in Year 1. The company expects to deliver 50,000 vehicles in the first year of production. The company expects the number of units delivered to increase by 25% in Year 2, 15% in year 3, with sales growth to fall by 5% each year thereafter for the remainder of the project's life. The company has estimated that the average selling price for the Pegasus will be $40,000 in its first year of availability. The company estimates that after this, the average selling price will fall by 2% per year as competition increases and consumers are presented with increasing options in the electric vehicle market. The company expects gross margin to be 5% in the first year of production, 10% in Year 2, and 20% every year thereafter. Gross margin can be calculated as:
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