Consider the following information.

Tesla new Gigafactory in China

Grace Dobush

Fortune: https://fortune.com/2018/08/01/tesla-china-factory-5-billion-elon-musk-shanghai/

1. Tesla is planning to open its first manufacturing plant (for the production of batteries) outside the US. You are one of the financial analyst that will help assessing the feasibility of the investment.
2. Tesla has commissioned one of the Big Four Consulting firm to provide some recommendations with regard to the current legal regulations in China. The consulting service fees will amount to 2 million dollars.
3. Suppose that the life of the project is 20 years and the initial investment in the project today is 500 million dollars.
4. The plant will be depreciated to $0 book value over the 20 years and can be sold by Tesla in year 20 for 100 million dollars.
5. It has been estimated that Tesla would be able to generate revenues of 150 million dollars per year (starting at the end of the first year).
6. The new production of batteries in China will have a direct impact on the production of batteries in the US. The contribution generated in the USAis estimated to drop by 5 million dollars (per annum) from what it is now. A contribution is the difference between revenue and variable costs.
7. The annual variable costs are expected to be 30% of the gross annual revenues (150 million).
8. The company tax rate is 30%.
9. The current weighted average cost of capital for Tesla is 10%, and the project has the same risk profile and financial structure of the company.
10. Elon Musk (Tesla CEO) wants to recover the initial investment, before the next election in China, in three years' time.

Using the information above, answer the following questions.

1.Calculate the free cash flows for this project. (Use the table below.) (12 marks)

Year 0

Years 1 to 19

Year 20

Revenue

Variable Costs

Revenue

Depreciation

EBIT

Tax

Net Income

Depreciation

Cap Expenditure

Salvage Value

Free Cash Flow

Present Value

2.What is the NPV of this project? (Show all necessary calculations.) (5 marks)

3.Should Tesla undertake this project based on your analysis? Explain why or why not. (3 marks)

4.If Tesla was able to obtain cheaper debt financing for this project, what effect would this have on the NPV you calculated in Part 2? Explain why. (5 marks)

5.Identify one other capital budgeting method (besides NPV) that Tesla should consider. Explain why. What are the advantages and disadvantages of this methodology? (5 marks)

Formula Sheet

DSI= 365 days/ (Cost of Sales/ Inventory)

DSO= 365/ (Net sales/Accounts receivable)

DPO= 365/ (Cost of sales/ Accounts payable)

Cash Conversion Cycle=DSO+DSI-DPO

Payback period (PB) = Years before cost recovery

+ Remaining cost to recover/ Cash flow during the year

Discounted payback period (DPB)

= Years before cost recovery + Remaining cost to recover/ Discounted cash flow during the year

Free Cash Flows (FCF) = [(Revenue - Op Exp - D&A) x (1-t)] + D&A - Cap Exp - Add Working Cap

WACC = x_dk_d(1-t) + x_osk_os + x_psk_ps

Capital Asset Pricing Model (CAPM), k_os = r_f + [Market risk premium]= rf+B(Erm-rf)

Tax shield = Debt x Corporate tax rate (t_c)

Consider the following information.

Tesla new Gigafactory in China

Grace Dobush

Fortune: https://fortune.com/2018/08/01/tesla-china-factory-5-billion-elon-musk-shanghai/

1. Tesla is planning to open its first manufacturing plant (for the production of batteries) outside the US. You are one of the financial analyst that will help assessing the feasibility of the investment.
2. Tesla has commissioned one of the Big Four Consulting firm to provide some recommendations with regard to the current legal regulations in China. The consulting service fees will amount to 2 million dollars.
3. Suppose that the life of the project is 20 years and the initial investment in the project today is 500 million dollars.
4. The plant will be depreciated to $0 book value over the 20 years and can be sold by Tesla in year 20 for 100 million dollars.
5. It has been estimated that Tesla would be able to generate revenues of 150 million dollars per year (starting at the end of the first year).
6. The new production of batteries in China will have a direct impact on the production of batteries in the US. The contribution generated in the USAis estimated to drop by 5 million dollars (per annum) from what it is now. A contribution is the difference between revenue and variable costs.
7. The annual variable costs are expected to be 30% of the gross annual revenues (150 million).
8. The company tax rate is 30%.
9. The current weighted average cost of capital for Tesla is 10%, and the project has the same risk profile and financial structure of the company.
10. Elon Musk (Tesla CEO) wants to recover the initial investment, before the next election in China, in three years' time.

Using the information above, answer the following questions.

1.Calculate the free cash flows for this project. (Use the table below.) (12 marks)

Year 0

Years 1 to 19

Year 20

Revenue

Variable Costs

Revenue

Depreciation

EBIT

Tax

Net Income

Depreciation

Cap Expenditure

Salvage Value

Free Cash Flow

Present Value

2.What is the NPV of this project? (Show all necessary calculations.) (5 marks)

3.Should Tesla undertake this project based on your analysis? Explain why or why not. (3 marks)

4.If Tesla was able to obtain cheaper debt financing for this project, what effect would this have on the NPV you calculated in Part 2? Explain why. (5 marks)

5.Identify one other capital budgeting method (besides NPV) that Tesla should consider. Explain why. What are the advantages and disadvantages of this methodology? (5 marks)

Formula Sheet

DSI= 365 days/ (Cost of Sales/ Inventory)

DSO= 365/ (Net sales/Accounts receivable)

DPO= 365/ (Cost of sales/ Accounts payable)

Cash Conversion Cycle=DSO+DSI-DPO

Payback period (PB) = Years before cost recovery

+ Remaining cost to recover/ Cash flow during the year

Discounted payback period (DPB)

= Years before cost recovery + Remaining cost to recover/ Discounted cash flow during the year

Free Cash Flows (FCF) = [(Revenue - Op Exp - D&A) x (1-t)] + D&A - Cap Exp - Add Working Cap

WACC = x_dk_d(1-t) + x_osk_os + x_psk_ps

Capital Asset Pricing Model (CAPM), k_os = r_f + [Market risk premium]= rf+B(Erm-rf)

Tax shield = Debt x Corporate tax rate (t_c)

Consider the following information.

Tesla new Gigafactory in China

Grace Dobush

Fortune: https://fortune.com/2018/08/01/tesla-china-factory-5-billion-elon-musk-shanghai/

1. Tesla is planning to open its first manufacturing plant (for the production of batteries) outside the US. You are one of the financial analyst that will help assessing the feasibility of the investment.
2. Tesla has commissioned one of the Big Four Consulting firm to provide some recommendations with regard to the current legal regulations in China. The consulting service fees will amount to 2 million dollars.
3. Suppose that the life of the project is 20 years and the initial investment in the project today is 500 million dollars.
4. The plant will be depreciated to $0 book value over the 20 years and can be sold by Tesla in year 20 for 100 million dollars.
5. It has been estimated that Tesla would be able to generate revenues of 150 million dollars per year (starting at the end of the first year).
6. The new production of batteries in China will have a direct impact on the production of batteries in the US. The contribution generated in the USAis estimated to drop by 5 million dollars (per annum) from what it is now. A contribution is the difference between revenue and variable costs.
7. The annual variable costs are expected to be 30% of the gross annual revenues (150 million).
8. The company tax rate is 30%.
9. The current weighted average cost of capital for Tesla is 10%, and the project has the same risk profile and financial structure of the company.
10. Elon Musk (Tesla CEO) wants to recover the initial investment, before the next election in China, in three years' time.

Using the information above, answer the following questions.

1.Calculate the free cash flows for this project. (Use the table below.) (12 marks)

Year 0

Years 1 to 19

Year 20

Revenue

Variable Costs

Revenue

Depreciation

EBIT

Tax

Net Income

Depreciation

Cap Expenditure

Salvage Value

Free Cash Flow

Present Value

2.What is the NPV of this project? (Show all necessary calculations.) (5 marks)

3.Should Tesla undertake this project based on your analysis? Explain why or why not. (3 marks)

4.If Tesla was able to obtain cheaper debt financing for this project, what effect would this have on the NPV you calculated in Part 2? Explain why. (5 marks)

5.Identify one other capital budgeting method (besides NPV) that Tesla should consider. Explain why. What are the advantages and disadvantages of this methodology? (5 marks)

Formula Sheet

DSI= 365 days/ (Cost of Sales/ Inventory)

DSO= 365/ (Net sales/Accounts receivable)

DPO= 365/ (Cost of sales/ Accounts payable)

Cash Conversion Cycle=DSO+DSI-DPO

Payback period (PB) = Years before cost recovery

+ Remaining cost to recover/ Cash flow during the year

Discounted payback period (DPB)

= Years before cost recovery + Remaining cost to recover/ Discounted cash flow during the year

Free Cash Flows (FCF) = [(Revenue - Op Exp - D&A) x (1-t)] + D&A - Cap Exp - Add Working Cap

WACC = x_dk_d(1-t) + x_osk_os + x_psk_ps

Capital Asset Pricing Model (CAPM), k_os = r_f + [Market risk premium]= rf+B(Erm-rf)

Tax shield = Debt x Corporate tax rate (t_c)

1. Tesla is planning to open its first manufacturing plant (for the production of batteries) outside the US. You are one of the financial analyst that will help assessing the feasibility of the investment.
2. Tesla has commissioned one of the Big Four Consulting firm to provide some recommendations with regard to the current legal regulations in China. The consulting service fees will amount to 2 million dollars.
3. Suppose that the life of the project is 20 years and the initial investment in the project today is 500 million dollars.
4. The plant will be depreciated to $0 book value over the 20 years and can be sold by Tesla in year 20 for 100 million dollars.
5. It has been estimated that Tesla would be able to generate revenues of 150 million dollars per year (starting at the end of the first year).
6. The new production of batteries in China will have a direct impact on the production of batteries in the US. The contribution generated in the USAis estimated to drop by 5 million dollars (per annum) from what it is now. A contribution is the difference between revenue and variable costs.
7. The annual variable costs are expected to be 30% of the gross annual revenues (150 million).
8. The company tax rate is 30%.
9. The current weighted average cost of capital for Tesla is 10%, and the project has the same risk profile and financial structure of the company.
10. Elon Musk (Tesla CEO) wants to recover the initial investment, before the next election in China, in three years' time.

Using the information above, answer the following questions.

1.Calculate the free cash flows for this project. (Use the table below.) (12 marks)

Year 0

Years 1 to 19

Year 20

Revenue

Variable Costs

Revenue

Depreciation

EBIT

Tax

Net Income

Depreciation

Cap Expenditure

Salvage Value

Free Cash Flow

Present Value

2.What is the NPV of this project? (Show all necessary calculations.) (5 marks)

3.Should Tesla undertake this project based on your analysis? Explain why or why not. (3 marks)

4.If Tesla was able to obtain cheaper debt financing for this project, what effect would this have on the NPV you calculated in Part 2? Explain why. (5 marks)

5.Identify one other capital budgeting method (besides NPV) that Tesla should consider. Explain why. What are the advantages and disadvantages of this methodology? (5 marks)

1. Tesla is planning to open its first manufacturing plant (for the production of batteries) outside the US. You are one of the financial analyst that will help assessing the feasibility of the investment.
2. Tesla has commissioned one of the Big Four Consulting firm to provide some recommendations with regard to the current legal regulations in China. The consulting service fees will amount to 2 million dollars.
3. Suppose that the life of the project is 20 years and the initial investment in the project today is 500 million dollars.
4. The plant will be depreciated to $0 book value over the 20 years and can be sold by Tesla in year 20 for 100 million dollars.
5. It has been estimated that Tesla would be able to generate revenues of 150 million dollars per year (starting at the end of the first year).
6. The new production of batteries in China will have a direct impact on the production of batteries in the US. The contribution generated in the USAis estimated to drop by 5 million dollars (per annum) from what it is now. A contribution is the difference between revenue and variable costs.
7. The annual variable costs are expected to be 30% of the gross annual revenues (150 million).
8. The company tax rate is 30%.
9. The current weighted average cost of capital for Tesla is 10%, and the project has the same risk profile and financial structure of the company.
10. Elon Musk (Tesla CEO) wants to recover the initial investment, before the next election in China, in three years' time.

Using the information above, answer the following questions.

1.Calculate the free cash flows for this project. (Use the table below.) (12 marks)

Year 0

Years 1 to 19

Year 20

Revenue

Variable Costs

Revenue

Depreciation

EBIT

Tax

Net Income

Depreciation

Cap Expenditure

Salvage Value

Free Cash Flow

Present Value

2.What is the NPV of this project? (Show all necessary calculations.) (5 marks)

3.Should Tesla undertake this project based on your analysis? Explain why or why not. (3 marks)

4.If Tesla was able to obtain cheaper debt financing for this project, what effect would this have on the NPV you calculated in Part 2? Explain why. (5 marks)

5.Identify one other capital budgeting method (besides NPV) that Tesla should consider. Explain why. What are the advantages and disadvantages of this methodology? (5 marks)

1. Tesla is planning to open its first manufacturing plant (for the production of batteries) outside the US. You are one of the financial analyst that will help assessing the feasibility of the investment.
2. Tesla has commissioned one of the Big Four Consulting firm to provide some recommendations with regard to the current legal regulations in China. The consulting service fees will amount to 2 million dollars.
3. Suppose that the life of the project is 20 years and the initial investment in the project today is 500 million dollars.
4. The plant will be depreciated to $0 book value over the 20 years and can be sold by Tesla in year 20 for 100 million dollars.
5. It has been estimated that Tesla would be able to generate revenues of 150 million dollars per year (starting at the end of the first year).
6. The new production of batteries in China will have a direct impact on the production of batteries in the US. The contribution generated in the USAis estimated to drop by 5 million dollars (per annum) from what it is now. A contribution is the difference between revenue and variable costs.
7. The annual variable costs are expected to be 30% of the gross annual revenues (150 million).
8. The company tax rate is 30%.
9. The current weighted average cost of capital for Tesla is 10%, and the project has the same risk profile and financial structure of the company.
10. Elon Musk (Tesla CEO) wants to recover the initial investment, before the next election in China, in three years' time.

Using the information above, answer the following questions.

1.Calculate the free cash flows for this project. (Use the table below.) (12 marks)

Year 0

Years 1 to 19

Year 20

Revenue

Variable Costs

Revenue

Depreciation

EBIT

Tax

Net Income

Depreciation

Cap Expenditure

Salvage Value

Free Cash Flow

Present Value

What is the NPV of this project? (Show all necessary calculations