Instructions

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, Les Dett.

For your meeting with the Ford Finance interviewers:

1. Review the attached material and prepare a one-page executive summary that addresses the alternative strategies outlined in the series of e-mail communications with Les Dett and others.

2. Please include the following items in your summary:

a. Financial analyses for each alternative you consider, as directed by Les in his e-mail

b. Your recommendation for which alternative should be chosen (if any)

c. A brief discussion of additional information that would assist you in your evaluation of the alternatives

From: Les Dett

To: Analyst

Subject: Dynamo Electrification

Date: June 24, 2019 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 with hybrid option 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 do a cash flow analysis. For cash flow assume we'll roll out this new model in 2021 Calendar Year. You can assume a 6 year cycle life as it will be replaced with an all-new model for the 2027 Model Year (which launches late in 2026). 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,

Les Dett

Controller, Dynamo Product Program

From: Cathy E. Olson

To: Bill Rand & Les Dett

Subject: Dynamo Strategy

Date: June 23, 2019 2:15 PM

Bill & Les,

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 small 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.

Cathy E. Olson

President, One World Automotive

From: Bill Rand

To: Les Dett

Subject: Dynamo Strategy - Finance Help Needed

Date: June 23, 2019 6:03 PM

Les,

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

No surprise that the oldsters are nervous. Going this route would add $10,000 to the vehicle's material cost and $20M in Tooling costs, not to mention an extra $8M at the plant during launch. They say 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. It doesn't hurt that he's bigger than life, but his product is fun to drive and gives 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 $20M 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. Yes, they have some EVs in their fleet, but as novelties. If we really do this, we could remake our image faster than we otherwise could to build our brand.

After the session, we talked pricing. We think we can get a $7,500 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'll get you some info on that.

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 Cathy 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 4%, twice what we get now.

Thanks,

Bill

From: Bob Lee

To: Analyst

Subject: RE: Dynamo L&OH Costs

Date: June 24, 2019 10:24 AM

Analyst,

Here's the data Les 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: Loretta Task

To: Bob Lee

Subject: RE: Dynamo L&OH Costs

Date: June 23, 2019 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 $1,000 per unit

Loretta Task

Supervisor

Manufacturing Finance

From: Irma Smith

To: Les Dett

Subject: Tax Credits - Dynamo Full Electric

Date: June 23, 2019 7:35 PM

Les,

Bill Rand asked me to give you the following information on tax credits:

BEVs customers are still projected to get a one-time $6,500 tax credit on federal taxes in the US through 2027

BEVs also get free use of the HOV lane in California, and people are willing to pay a premium for that. Since 20% of our sales are projected in CA, that's pretty significant.

In China, the credits are also strong. While local vehicles get more credits, we assume that imported vehicles will get similar credits to US sales, maybe even a little more.

There's a patchwork of state credits, as well - California grants an extra $1,000, while East Coast states offer $500 over and above the federal credits.

Irma R. Smith

Office of Tax & Government Affairs

From: Corporate Treasurer's Office

To: All Global Car Finance Employees

Subject: Corporate Finance Assumptions

Date: June 1, 2019 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 - 12%

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

Corporate Tax Rate -- 35%

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 proejcts, please use the following guidelines to calendarize program spending cash flows:

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

Year Prior To Launch (Year 0)Year of Launch (Year 1)Facilities and Tooling80%20%Engineering Expense90%10%Launch Expense20%80%