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, \& Equipment will be required immediately. This capital expenditure will be fully depreciated using the straight-line method over an 8-year depreciable life. - 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: GrossMargin=RevenueRevenueCOGS - A summary of these baseline forecasts is provided below: Some further assumptions: - The company expects operating expenses (SG\&A) of $100 million per year, beginning in Year 1 , and continuing for the life of the project. - In addition, the company expects an additional $100 million investment in Research \& Development in Year 1 in order to finalize the design of the vehicle and its groundbreaking battery technology. After Year 1 , the company expects R\&D expenses of $25 million per year for the remainder of the project. - Furthermore, the company anticipates having to spend $40 million on marketing in Year 1 , in advance of the launch of the Pegasus. Marketing expenses are expected to fall by 10% per year after Year 1. - Final assembly of the Pegasus will take place in the Pershing Assembly Building. MRA currently leases a portion of this building to a third party for $25 million annually. If the Pegasus project moves forward, this third party will need to relocate its operations immediately and will no longer lease the space from Year 1 onward. - Though the company is fully depreciating its equipment over 8 years, it has also estimated that it will likely be able to sell some of this equipment at the end of the project's life. You anticipate that the equipment could be sold for $60 million at the end of the project's life. - The company expects that the vast majority of its sales will be to new customers making the transition from traditional, gas-powered vehicles. However, they also expect that determined that t0k of its atnual Tecasurs 1 bles aill fall iete this tatrgery- Other wehicies matufactured by Miph have an aver ages selling ;rict al 53s,000 asd are produced at an deesate grost markit of 20s. - For accountiry pupposes, exsept tor any itwet ment in Crepti, wich a bi be recognited the year during which they take place Deliuerable projects. As maginal carporate tax rate is 29ik. When completies your incremental FCF loutast asd asietrieg the following quesciunt. lis effect. 100,000 thousand dollan?. la addition bo providing a complete instemental tree cash fow forecast, pleae answer the tollowing questich: 3. In order to meet ades sprowth targets, MRA th ande thin it may need to lower the price of the Pegasts in order to incertwar nustomers blapoose their product dver a competitor's. the project's value is impacted if they need ta be more arryetsive in pricing the Pepaius. awmptions. What is the NPV breat-ven ievel of tor dow in averaye sellind price bepond Vear 1. Again, haid all other msumptions carstart. 4. Mala ancicigates grost margin to increave fram 4 : in tear I of prochuction to 20% by Year 7 of production due te elficienty zains in protuetion procenan an weit as lewer production conts. However, there is some boncern that thein matimatst ane toe corimistic. Molding out gots margin estimasest edratant in the fart 2 yean of ogeratiant, what is the NPY brtak-evert level af grveat markin that must ae abithed by Yeat I of qperations and maintaited for the remainder of the poolest't likt. to the corporate tax code that ia hopes will encturage invertment in these typel of 50N of the cost of ary capex investment to be therecianed in its firat year Vear 1]. The remaining soss ail be depreciated tevely oren the oricinal assumed desreciable life. What is the Nry of the Ferapas project using these upd ated depreciation asmmptiors? Despite of sts accouving. Which depreciation method should you ut ire in your FCF and NPV malysis? 6. What is the 12.2 of thit preject? Preside vour ar aepe to 1 decimal plact (i. 134). 20+4 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, \& Equipment will be required immediately. This capital expenditure will be fully depreciated using the straight-line method over an 8-year depreciable life. - 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: GrossMargin=RevenueRevenueCOGS - A summary of these baseline forecasts is provided below: Some further assumptions: - The company expects operating expenses (SG\&A) of $100 million per year, beginning in Year 1 , and continuing for the life of the project. - In addition, the company expects an additional $100 million investment in Research \& Development in Year 1 in order to finalize the design of the vehicle and its groundbreaking battery technology. After Year 1 , the company expects R\&D expenses of $25 million per year for the remainder of the project. - Furthermore, the company anticipates having to spend $40 million on marketing in Year 1 , in advance of the launch of the Pegasus. Marketing expenses are expected to fall by 10% per year after Year 1. - Final assembly of the Pegasus will take place in the Pershing Assembly Building. MRA currently leases a portion of this building to a third party for $25 million annually. If the Pegasus project moves forward, this third party will need to relocate its operations immediately and will no longer lease the space from Year 1 onward. - Though the company is fully depreciating its equipment over 8 years, it has also estimated that it will likely be able to sell some of this equipment at the end of the project's life. You anticipate that the equipment could be sold for $60 million at the end of the project's life. - The company expects that the vast majority of its sales will be to new customers making the transition from traditional, gas-powered vehicles. However, they also expect that determined that t0k of its atnual Tecasurs 1 bles aill fall iete this tatrgery- Other wehicies matufactured by Miph have an aver ages selling ;rict al 53s,000 asd are produced at an deesate grost markit of 20s. - For accountiry pupposes, exsept tor any itwet ment in Crepti, wich a bi be recognited the year during which they take place Deliuerable projects. As maginal carporate tax rate is 29ik. When completies your incremental FCF loutast asd asietrieg the following quesciunt. lis effect. 100,000 thousand dollan?. la addition bo providing a complete instemental tree cash fow forecast, pleae answer the tollowing questich: 3. In order to meet ades sprowth targets, MRA th ande thin it may need to lower the price of the Pegasts in order to incertwar nustomers blapoose their product dver a competitor's. the project's value is impacted if they need ta be more arryetsive in pricing the Pepaius. awmptions. What is the NPV breat-ven ievel of tor dow in averaye sellind price bepond Vear 1. Again, haid all other msumptions carstart. 4. Mala ancicigates grost margin to increave fram 4 : in tear I of prochuction to 20% by Year 7 of production due te elficienty zains in protuetion procenan an weit as lewer production conts. However, there is some boncern that thein matimatst ane toe corimistic. Molding out gots margin estimasest edratant in the fart 2 yean of ogeratiant, what is the NPY brtak-evert level af grveat markin that must ae abithed by Yeat I of qperations and maintaited for the remainder of the poolest't likt. to the corporate tax code that ia hopes will encturage invertment in these typel of 50N of the cost of ary capex investment to be therecianed in its firat year Vear 1]. The remaining soss ail be depreciated tevely oren the oricinal assumed desreciable life. What is the Nry of the Ferapas project using these upd ated depreciation asmmptiors? Despite of sts accouving. Which depreciation method should you ut ire in your FCF and NPV malysis? 6. What is the 12.2 of thit preject? Preside vour ar aepe to 1 decimal plact (i. 134). 20+4