Option 1: a fully electric model - SUV electric

The first option is for the car manufacturing company to produce an electric car. This is based on the growing popularity of electric cars and the reduced taxation offered by the government as an incentive to car manufacturers for the production electric vehicles. At the same time, the electric model is expected to have a higher production cost as it will require significant investment to develop the necessary production line. The production will require special software that will need to be maintained and updated every year. Before the production begins, the production staff will need training in the use new production line and the specialist software. The HR team suggests that the company will benefit from this project by building key skills required to produce environmentally friendly vehicles.

The investment in the production line equipment and the staff training will be fully depreciated by the end of the project using the straight-line method.

The team has produced the following projections for the electric model (SUV electric).

Table 1: Projections for the electric model (SUV electric)

Projected sales and costs	Total
Expected sales in units of the SUV electric in year 1	10,000
Year-on-year change in sales	3%
Selling price per unit of the SUV electric	52,500
Cost per unit of SUV electric:
Labour	10% of selling price
Material	50% of selling price
Special battery	10% of selling price
Annual maintenance and update of software	250,000
Investment in production line (required in year 0)	500,000,000
Training of staff (required in year 0)	10,000 ,000
Working capital required in year 0 and recovered at the end of the project in year 5	20,000,000
Corporation tax rate (reduced for electric vehicles) The tax is paid in cash in the year that the profit is recorded.	15%
Cost of capital	13%

Duration of the project

5 years

Option 2: hybrid model SUV Hybrid

The second option is to produce a hybrid electric car. The hybrid option reflects the concerns raised by some older members of the production team about moving to a fully electric model. These experienced mechanics argued that the company's expertise is in producing conventional vehicles, and this should not be abandoned by switching to the production of fully electric vehicles.

The production line of the hybrid model will require a lower initial investment than the electric model. Also, since a great part of the hybrid model's technology will be based on the conventional combustion engine, there is no need for staff training. Although estimated to be higher than conventional cars, the year-on-year growth in the sales of hybrid cars is expected to be lower than electric cars. The price of the Hybrid model is lower than the Electric model as it reflects the lower production costs and the market price of similar models. The profit made from the production and sale of hybrid cars is not subject to tax incentives. The investment in the production line equipment will be fully depreciated by the end of the project using the straight-line method.

The team has produced the following projections for the hybrid model (SUV Hybrid).

Table 2: Projections for the hybrid model (SUV Hybrid)

Projected sales and costs	Total
Expected sales in units of the SUV Hybrid in Year 1	12,000
Year-on-year change in sales	1%
Selling price per unit of the SUV Hybrid	31,000
Cost per unit of the SUV Hybrid:
Labour	8%
Material	50%
Hybrid technology	10%
Annual maintenance of production equipment	100,000
Investment in production line	410,000,000
Working capital required in year 0 and recovered at the end of the project in year 5	15,000,000
Standard corporation tax rate The tax is paid in cash in the year that the profit is recorded.	20%
Cost of capital	13%
Duration of the project	5 years

Task

1. Write a report to the Executive Board of ImagineSLA to:

1. Present your findings from 1.a) and 1.b) and explain your recommendation about the most suitable car model to be produced based on the investment appraisal methods' outcomes.

2. Discuss any other factors that the Executive Board needs to consider when making their final decision. Reflect on broader qualitative and quantitative factors that may affect each car model's attractiveness and profitability in the longer term.

c. Outline the advantages and limitations of each of the methods you have used.