in this question i want the Calculation of the Cost of Capital using any other method except the pure play approach.
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Capital Investment Analysis The Tuxedo Corporation have also asked that your team evaluate two production alternatives submitted by the production department for the new Tuxedo Electric vehicles. The proposed capital project calls for developing the plant for producing the Tuxedo Electric Vehicles. Two alternatives plant models are proposed. Alternative A is a Semi-automated system that has initial equipment and software development costs projected at $940,090,000. $550,000,000. Alternative B is a fully automated system that is estimated with an initial equipment and software cost estimated to be $550,000,090 $940,000,000. For each alternative, the initial equipment and software costs would be capitalized and qualify for a capital cost allowance (CCA) rate of 30 percent. You will use the cost of capital obtained through the pure play approach for evaluating the two alternatives. As an environmental friendly product, the Tuxedo Corporation pay corporate tax at the rate of 35 percent for investments in its EV manufacturing project. The market research conducted by a marketing consultant indicated three possible economic condition for the next five years. The market research indicated that the economy can be normal, booming or there can be a recession. The consultants provided the probability of each state of the economy. They also estimated sales for next year and the expected increase in sales for the subsequent years under each possible economic condition. The expected sales data provided by the market research consultant for the Tuxedo Electric Vehicle is presented in the table below:Table 3 Expected Economic Condition. Estimated Sales Units and Projected Annual Increase in Sales for the Tuxedo Electric Vehicle. State of the Economy Probability Sales Units Yearly Expected Increase in Sales Units 2021 2022 2023 2024 2025 Recession 20% 150,000 5% 5.50% 6.05% 6.50% Normal 50% 200,000 2% 120% 8.42% 9.32% Boom 30% 250,000 10% 11.00% 12.10% 13.31% Although the initial cost of building the semi-automatic production plant for the Electlic 1ll'ehicle is cheaper than the option to build a fully automated system, the operating cost of the semiautomatic system is higher. Electn'c car produced from either of the two alternative plant are the same. The main difference is the approach adopted in the production process. Each of the Tuxedo Electric car is expected to command a price of $41,000. The estimated unit variable cost of producing each Tuxedo E'|.IIr is as shown in the table below Table 4 Per Unit Production Cost for the Tuxedo Electric Vehicle - Semi-Automatic and Fully-Automatic Production System Alternative A Alternative B Semi-Automatic Fully-Automatic Year System System 2,021 $28,000 $22,000 un 2,022 29,400 23,100 2,023 30,870 24,255 2,024 32,414 25,468 2,025 34,034 26,741The Tuxedo Corporation expect to invest $80,000,000 as initial working capital. The working capital will increase by 25 percent of the annual increase in sales revenue of the following year. The equipment purchased for each alternative production process will last for five years at the end of which the working capital is irrecoverable. The company also has an annual fixed cost of $2 billion For Intellectual property security reasons, it is company policy not to rent excess production capacity to outside users. Your team is required to address the following in your report to the Tuxedo Corporation executives: a. Prepare a capital budgeting analysis with as many tools as possible to evaluate each of the alternatives production system. Both the semi-automatic and the fully automatic production system have 5-year useful life. b. Jack and Mark's suspect that there is a high risk that new technology will render the production equipment in the Semi-Automatic production system useless at the end of three years and may need to be replaced to continue production if this alternative is chosen. The fully automatic production system on the other hand will last 5 years before needing complete replacement. Jack and Mark want you to recommend the alternative that the company should adopt if it chooses not to replace. They also will like you to make a recommendation regarding the system to adopt if they choose to replace after the suspected useful life of each alternative. The Tuxedo Corporation could salvage the equipment in the Semi-Automated production system for 30 percent of its original cost at the end of the third year and for 15 percent by the end of the fifth year. The realizable salvage value for the fully automated system is 10 percent of its original cost by the end of year 5
