On January 10, 2023, the chief financial officer (CFO) of Liz Motor Corp. (Liz), Annie Anthony, was sitting in her office in the Liz world headquarters building in downtown Chicago thinking about how to improve Lizs performance in environmental, social, and governance (ESG) areas, which were vital for the companys survival and growth. The Chicago River, in the distance, did not seem to have even slight ripples on the surface, but Anthony could sense a frightening undercurrent. Last night, the board meeting had ended in anxiety: the stock price had dropped 6.2 per cent after the companys ESG rankings for 2022 had been released, and the board had asked the chief executive officer (CEO) and CFO to invest more in the companys ESG efforts for a quick turnaround in 2023. Anthony had had this ESG project in mind for quite a while, but she was facing a tough decision. The project would help the company develop and install solid-state batteries in most Liz electric vehicles (EVs) and reduce the carbon footprint of EV batteries by 39 per cent. The technology was so new that Liz would be the first major automaker to use it on a large scale. The project would increase the sales and profit margin of Liz cars in the long run, but it would also require a heavy initial investment in acquiring and adopting the technology, and there were all kinds of uncertainties in the process. Anthony believed she should develop a framework to analyze the project rigorously. INDUSTRY TRENDS In the Leaders Summit on Climate in April 2021, US President Joe Biden pledged to halve the countrys greenhouse gas emissions by 2030.1 Meanwhile, the European Commission had proposed a 55 per cent cut in CO2 emissions by 2030 and another 100 per cent cut over the following five years. As a result, by 2035, selling fossil-fuel-powered vehicles would be nearly impossible in the European Union. Prior to these pledges, the European Green Deal and the Paris Agreement had also required automakers to seek sustainable alternatives to meet the carbon-neutral targets stated in the agreements. China, as the leading manufacturer of sustainable technologies, had also pledged to achieve carbon neutrality by 2060. While gradually transitioning to EVs, the automobile industry had been urged by climate change committees and governments to reduce its carbon footprint related to the materials used in manufacturing.3 In particular, the carbon emissions from manufacturing an EV were the same as those from manufacturing a similar-sized combustion car. A typical mid-sized car released around 24 tons of carbon dioxide during its life cycle, while a similarly sized EV produced about 18 tonswith 46 per cent of this total carbon generated during manufacturing.4 In fact, the batteries used in EVs alone increased carbon emissions during manufacturing by an average of 15 per cent.5 The research on EV batteries, which was largely sponsored by government agencies such as the US Department of Energy, was growing fast. Not only could EV batteries significantly reduce the carbon footprint of car manufacturing, but they could also alleviate consumers concerns about cost efficiency and safety, thereby facilitating a faster transition to EVs.6 LIZ MOTOR CORP. Liz Motor Corp. was one of the leading manufacturers of EVs in the United States. The company had aspired to become the market leader for electric cars since its inception in 2012. In recent years, Liz had expanded its product diversity by manufacturing battery-powered buses, trucks, and other vehicles. Its sales had seen healthy growth in the past four years due to the popularity of its compact and sports cars among younger consumers. However, while the EV market was expanding and becoming mainstream, established carmakers around the world had ripped up their traditional business plans by adding more and more EVs to their line-ups. The market had suddenly become so crowded that Lizs advantage had diminished. Its sales growth dropped from 26 per cent in 2021 to 17 per cent in 2022. As a young company, Liz still had several significant advantages over the more traditional and established players in the industry. These players had to deal with extensive dealer networks, entrenched labour unions, and legacy business practices, all of which were costly, to get into the EV market and wage an all-out war against Liz. They couldnt simply terminate their traditional business of fuel-powered cars, where most of their revenue was. At the same time, Liz was investing heavily in its modular EV production platform in its factories in the United States, Canada, and China. Liz also announced that it had secured $3.5 billion7 in financing over the next three years to launch 20 new EV models by 2027. Meanwhile, much to the surprise of the market, the company signalled that it would manufacture its own batteries for the entire line-up of Liz EV cars. These ambitious plans were expensive, but there was no turning back for Liz, particularly considering the industry trends and competition, the aggressive carbon-footprint targets set by policy makers, and the high expectations of socially responsible stakeholders. THE TECHNOLOGY Solid-state batteries consisted of solid electrolytes made of glass, ceramics, solid polymers, or sulphites, which differed from the polymer gel and liquid electrolytes traditionally used in lithium-ion batteries. Lithium-ion batteries, a standard for EVs, were constructed with liquid electrolytes to manage the flow of energy between cathodes and anodes, and this made the batteries heavy. Moreover, the flammability of electrolytes at extreme temperatures had caused explosions and fires; cell phones, airplanes, and EVs had all been reported to have caught fire due to the flammable liquid electrolytes. Conversely, solid-state batteries with solid electrolytes weighed less, exhibited more energy density and output, charged faster, and offered better operational safety. The higher thermal stability of solid-state batteries also limited the risk of fire and explosion.8 Solid-state batteries also stored more energy using far less material; therefore, fewer emissions were needed to make them. This could reduce the carbon footprint of an electric car battery by 39 per cent on average.9 Battery manufacturers forecasted that solid-state batteries would be used in almost all EVs in the near future.10 While no major automakers had used this technology on a large scale, it could be expected that any company lagging behind faced a risk of being dropped by investors, customers, suppliers, employees, communities, and government. THE PROJECT Sunlight flooded in, reflecting off the Willis Tower building opposite. Anthony drew the curtain and opened an Excel file named Solid Liz on her computer desktop. The numbers in front of her were familiar. The initial investments (i.e., cash outflows) would include $800 million in the first year to acquire the technology and $20 million annually for the following four years to fully develop and adopt the technology. The returns (i.e., cash inflows) would be generated starting from the fifth year and would amount to $200 million each year due to increased sales and profit margins.11 Lizs research and development department expected that the technology would become obsolete after 12 years. To fund this ESG project, Anthony was contemplating raising debt for the project; the after-tax cost of debt for Liz would be 8 per cent. There were uncertainties of course. Anthony had to consider the following 10 possible outcomes and perform 10 separate sensitivity analyses: First, if the Federal Reserve continued to raise interest rates in 2023, the after-tax cost of debt would be 8.5 per cent. Second, Liz could issue a new 12-year green bond catering to socially responsible investors who required relatively lower returns, which would result in an after-tax cost of debt of 7.5 per cent for the project. Third, the European Union planned to implement the Carbon Border Adjustment Mechanism in 2026, which would give Lizs EVs with solid-state batteries a big advantage; the returns from the project could reach $220 million each year.12 Fourth, Liz could sell the technology to another automaker by the end of the 12th year for $100 million. Fifth, if the technology turned out to be more valuable than expected, it could generate $210 million annually from the fifth year and could be worth $810 million in the market (in 2023). Sixth, before investing in the project, Anthony expected that some other major automakers would use similar technology to enter the market by 2027this would reduce Lizs expected returns to $180 million annually. Seventh, if, after Liz invested in the project in the first year, a competitor did enter the market, should Liz discontinue the project? If it were discontinued in 2028, the salvage value of selling the project to another automaker would be $500 million at that time. Eighth, the market could accept the technology gradually; the return from the project in the fifth year would be $152 million, and this would grow at 5 per cent annually. Ninth, hydrogen-powered vehicles could have a breakthrough in technology and quickly dominate the market, driving out solid-state battery vehicles. With a probability of 30 per cent, this possibility would shorten the life span of the project to 10 years and completely wipe out the salvage value of the technology. Finally, the cash flows and the hurdle rate given above assumed the inflation rate was negligible. However, due to recent inflation hikes, Anthony wondered if she should incorporate an expected inflation rate of 3 per cent in her analyses. While developing a quantitative capital budgeting model in the spreadsheet to determine the financial viability of the ESG project, Anthony also listed all the projects potential benefits, which could not be quantified in the model. She wondered which of the following benefits could help her justify the investment: First, this ESG project could build social capital and trust, thereby reducing the firms overall risk and cost of capital. For example, research showed the stock market reaction to negative events was much less negative for firms with higher ESG standings.13 Second, the project could improve Lizs corporate image and boost its brand value. It was estimated that a strong ESG would produce greater shareholder value, and 60 per cent of companies across the United Kingdom, the United States, and Canada noted that the greatest benefit of ESG was an improved image.14 Third, as a strategy for product differentiation and innovation, the ESG project could increase competitiveness and market opportunities. Enhanced product differentiation led not only to higher demand but also to less-elastic demand, and lower demand elasticity resulted in lower risk to firms. Fourth, it might further save costs by reducing wastage levels and reusing materials. Carbon footprints were costly for companies. Although the United States did not have a national carbon tax, 12 US states had active carbon-pricing programs and were successfully reducing emissions.15 Fifth, the project could mitigate regulatory risk. ESG could enable companies to achieve greater strategic freedom by easing regulatory pressure. For example, manufacturers using environmentally sustainable products and protocols were less burdened by regulatory and legal challenges related to pollution. Sixth, the US government was very likely to offer consumers more incentives, in addition to the existing federal EV tax credit, for buying EVs. Finally, this ESG project could boost the productivity of employees and help with employee hiring and retention. ESG projects could enhance employee motivation since a positive social impact correlated with job satisfaction and gave employees a sense of greater purpose. Strong ESG propositions, by creating better social credibility, could also attract and retain quality employees. Anthony believed that she had all the necessary information for a thorough capital budgeting analysis of this critical project for Liz. She was scheduled to discuss the results with the CEO by the weekend. A heated debate seemed inevitable at the next board meeting in January 2023. EXHIBIT 1: TIMELINE OF CASH FLOWS (IN US$ MILLIONS) 2023 = $800 2024 = $20 2025 = $20 2026 = $20 2027 = $20 2028 = $200 2029 = $200 2030 = $200 2031 = $200 2032 = $200 2033 = $200 2034 = $200 2035 = $200 Questions 1. Base model: project the cash flows for 2023 to 2035 and evaluate the investment decision by calculating the NPV, payback period, IRR and PI. 2. Sensitivity analysis: complete the sensitivity analysis based on the list of uncertainties given in the case