In this fictitious case, you are a financial analyst in the Product Development staff of One World Automotive, a global manufacturer of automotive vehicles and products. Your responsibilities include evaluating the financial and strategic implications of future product decisions.

Attached are relevant e-mails and data you have received from your manager, Kelly Kirkland.

For your meeting with the Ford Finance interviewers:

1. Financial analyses for each alternative you consider, as directed by Kelly in his e-mail
2. Your recommendation for which alternative should be chosen (if any)
3. A brief discussion of additional information that would assist you in your evaluation of the alternatives

E-Mail for Analyst

From: Kelly Kirkland

To: Analyst

Subject: Dynamo Electrification

Date: June 24, 2020 8:58 AM

Analyst,

I need your help evaluating a product proposal on our new premium vehicle, the Dynamo. If you look at the string of notes attached, you'll see management would like to evaluate changing the powertrain lineup for the Dynamo from a traditional gas engine to a fully electric powertrain. There are many factors to consider as we think about whether this makes sense, but as we enter into the discussion, I want to be armed with appropriate financial data.Would you please look at the attached data I've been able to collect and evaluate some alternatives?

I'll have Bob Lee in manufacturing provide you with some information on labor costs.

Please lay out the alternatives so we can understand the impact on the income statement (including operating margins) and a cash flow analysis. For cash flow assume we'll roll out this new model in 2022 Calendar Year.One key question is the cycle life of the product - the Company has invested heavily in connected vehicle services, so the possibility for over-the-air updates may extend the cycle life from six years to eight. We will need to understand if this is a worthwhile option. Let me know what you'd recommend based on the available data, and please let me know also what other data would be required to enhance your analysis.

It sounds like Company leadership really wants to head in this direction so let's take a look at the numbers and see what will work.

Regards,

Kelly Kirkland

Controller, Dynamo Product Program

E-Mail for Kelly Kirkland

From: Camila Greene

To: Drake Weber & Kelly Kirkland

Subject: Dynamo Strategy

Date: June 23, 2020 2:15 PM

Drake & Kelly,

I've been reading all these reports of how people love the new Tesla and I worry that we're missing the boat. I know we have production-ready electrified powertrains. I'd like to see about getting one into our new flagship Dynamo SUV for 2022MY. Not as an additional powertrain, but as the ONLY powertrain.Can you get your marketing team and the product development team and see what they think? We need to move quickly to get this into the cycle plan.

I think this could be a real game-changer for us and our premium brand.

Camila Greene

President, One World Automotive

E-Mail for Kelly Kirkland

From: Drake Weber

To: Kelly Kirkland

Subject: Dynamo Strategy - Finance Help Needed

Date: June 23, 2020 6:03 PM

Kelly,

Here's a summary of the meeting my team had on this today:

Going this route would add $15,000 to the vehicle's material cost and $25M in Tooling costs, not to mention an extra $6M at the plant during launch. They said no one who is buying a vehicle in that segment gives a hoot about fuel economy, so if that's the reason to do it, forget about it. I agreed but pushed the whole team into a whiteboarding session on all the benefits of electrification. Here's what we've got:

1. Environmentally friendly - about 10% of our luxury buyers think this is a really big deal and are willing to pay more to help the environment
2. Cool factor - one reason Tesla has captured the hearts of buyers is that Elon Musk has made it cool. Tesla products are fun to drive and give people a great experience.A lot of the team felt that pairing the Battery Electric (BEV) powertrain with the other great features on the Dynamo will really enhance the image of the vehicle - not only here, but especially in China where the CO2 impact is even more important, and we already have a strong brand equity.
3. Performance - latest data show that the BEV powertrain gives faster 0-60 and better low-end torque (and therefore better performance off-the-mark). Increased performance does have a cost, however, and requires an additional $30M in engineering.
4. Quiet, quiet, quiet. Our goal to get a quiet cabin experience is enhanced SIGNIFICANTLY by the electrified powertrain coupled with the new CVT. No engine noise. No transmission shift feel. No fuel pump whine. We ought to be able to pull out some significant NVH measures as a result.
5. A way to set us apart from the Europeans. Investments in over-the-air updates will help keep the vehicle feeling newer for longer, potentially enabling us to extend the cycle life up to 8 years if it makes financial sense. Need to get with Alexandra on that.

After the session, we talked pricing. We think we can get a $12,000 per unit premium vs. the current planned MSRP. We might be able to squeeze some more pricing out of these factors without hurting volumes too much, but that will depend highly on the personal tax rebates customers can expect to get.

I've attached the latest program income statement to this document. It shows the profitability for the Dynamo at the current assumptions - 100% gas engine lineup.

Can your team work up a financial summary that we can review and take back to Camila Monday morning?

Oh, I almost forgot.The team also said that the new technology on the electrified powertrain means we can likely achieve year over year cost reductions of 6.25%, 2.5x more than what we get now.

Thanks,

Drake

E-Mail for Kelly Kirkland

From: Bob Lee

To: Analyst

Subject: RE: Dynamo L&OH Costs

Date: June 24, 2020 10:24 AM

Analyst,

Here's the data Kelly asked for on the Dynamo.

If you need any more data from my team, just let me know.

Bob Lee

Manager, Manufacturing Finance

----Original Message------

From: Alisha Wagner

To: Bob Lee

Subject: RE: Dynamo L&OH Costs

Date: June 23, 2020 4:30 PM

Bob,

Per the discussion at our team meeting, we were able to pull together some data for the study.

Based on the designs we studied and the complexity involved with the new powertrain and electrical architecture, we think the total labor impact will be higher by about $1,500 per unit.

Alisha Wagner

Supervisor, Manufacturing Finance

E-Mail for Kelly Kirkland

From: Alexandra Ball

To: Kelly Kirkland

Subject: Over the Air Updates - Dynamo Full Electric

Date: June 23, 2020 7:35 PM

Kelly,

Drake Weber asked me to give you the following information on over-the-air updates:

• Much of the associated connectivity costs are already within the vehicle to support Bluetooth and other infotainment system features, such as wireless charging
• Impact of material cost therefore is negligible
• Ongoing software development, validation, testing, and implementation would most likely be around $10M per year for the life of the product

Alexandra R. Ball

Chief Connectivity Engineer - Small SUVs

MEMO:

From: Corporate Treasurer's Office

To: All Global Car Finance Employees

Subject: Corporate Finance Assumptions

Date: June 1, 2020 4:03 PM

We want to take this opportunity to remind all Finance employees of the Corporate assumptions. Using these common assumptions in our analysis across the all functions and regions ensures that we provide our operating management with consistent analysis and allow them to make the best decisions for the Company.

Corporate Weighted Average Cost of Capital - 10%

WACC should be used as the standard hurdle rate for most decisions.

Corporate Tax Rate - 25%

Depreciation (for Product Line Profits)

• Facilities and Tooling - Over the program life
• Land - 50 years
• Assume straight line depreciation in all cases
• Engineering & Launch are expensed in the first year of production

Operating Margin

Operating margin is equivalent to Profit Before Tax divided by Net Revenue. Profit Before Tax is calculated as follows:

Net Revenue

Less Variable Cost

Less Labor & Overhead

Less Program Spending

Less Other Fixed Cost

Spending Analysis

To ensure consistent cash flow comparisons across Corporate projects, please use the following guidelines to calendarize program spending cash flows:

	Year Prior to Launch (Year 0)	Year of Launch (Year 1)
Facilities and Tooling	80%	20%
Engineering Expense	90%	10%
Launch Expense	20%	80%

Inventory Valuation

Inventory should be valued on a First In, First Out basis