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Problem: A large auto company has just completed the research and development (R&D) on a new product, the Electrobicycle. The Electrobicycle is an electronic, climate-controlled bicycle with zero emissions. The R&D efforts focused on developing the capability to utilize electricity to power bicycles. Ultimately, the auto company expects Electrobicycles to be popular for most urban citizens due to convenience and low cost. The R&D, which cost $3 million, is complete and paid for. The plant and equipment to mass produce the Electrobicycles will cost $2 million. This plant and equipment will be depreciated over 5 years using the straight-line method to zero book value ($400,000 per year). A working capital investment of $1 million will be needed at the beginning of the project. A working capital investment of $200,000 per year will be needed thereafter. At the end of 5 years, the auto company believes there will be no more sales opportunities for Electrobicycles and will cease all production. Thus, at the end of the project, all working capital investments (the $1 million initial investment and the $200,000 per year) will be recovered at full value. The plant and equipment will be scrapped for a salvage value of $300,000 (after tax). The company expects moderate sales in years 1 and 2, and then significant growth in each year thereafter as consumers adopt the Electrobicycles. Revenues and earnings will cease at the end of Year 5. The revenues, after-tax earnings, and cash flow for the 5-year life of the project are shown in this table. Table 1 Projected Electrobicycle Financial Projection Numbers in $000's Today Year 1 Year 2 Year 5 Revenues After-tax earnings $1,000 ($500) $1,500 $100 Year 3 $3,000 $300 Year 4 $6,000 $600 $12,000 $1,200 Project Cash Flow $100 $400 ($500) $400 $300 $600 $400 $1,200 $400 $400 ($2,000) $0 $0 $0 $0 $0 After-tax earnings Plus: Depreciation Less: Cost of plant, equipment Less: Working capital Plus: Recovery of working capital Plus: Salvage value Annual project cash flow ($1,000) ($200) ($200) ($200) ($200) ($200) n/a n/a n/a n/a $2,000 n/a n/a n/a n/a $600 ($300) $300 $500 $800 $4,000 Note: n/a = not applicable Calculate: Determine the NPV for the Electrobicycle project. Use the annual project cash flow from the table above. For the required rate of return, use the percent value from your birthday date. For example, if your birthday falls on the 16th of the month, the required rate of return would be 16%. For guidance, review Section 7.1 of the textbook, NPV Example: The Pizza Scooter Delivery Project Revisited. Period 1 2 3 7 8 10 11 12 13 14 15 16 17 18 19 1% 2% 3% 6% SH } 10% 12% 13% 15% Period 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0 8929 0.8850 0.8772 08696 1 0.9803 0.9512 0.9426 0.9246 0.9070 08900 08/34 08573 0.8417 0.8254 0.8116 0.1972 0.7831 0.7695 0.7561 2 0.9706 0.9423 0.9151 0.8890 0.8538 0.8396 0.8163 0.7938 0.7722 0.7513 0.7312 0.7118 0.6931 0.5750 0.6575 0.9510 0.9238 0.8385 0.8548 0.8227 0.7921 0.7529 0.7350 0.7084 0.6830 0.6587 0.6355 0.5133 0.5921 0.5718 0.9515 0.0328 0.96.25 0.8219 0.7835 0.7473 0.7130 0.6835 0.6499 0.6209 0.5935 0 5674 0.3428 0.5194 0.49725 0.0161 0.0176 0.8375 0.793 0.7462 0.7050 0.6853 0.6392 0.5963 0.5645 0.5346 0.3086 0.4803 0.4556 0.4323 6 0.927 0.0096 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.6132 0.4817 0.4623 0.4251 0.3996 03789 7 0.9235 0.0053 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4339 0.4099 0.3762 0.3306 0.3259 8 0.9143 0.7477 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4504 0.4241 0.3909 0.3806 0.33 29 0 3075 0.2843 0.9053 08401 0.7441 06256 0.6139 0.5584 0.5083 04632 0.4224 0.3855 0.3522 0.3220 0.2946 0 2697 02472 10 0.8963 0.9004 0.7224 0.6496 0.5847 0.5259 0.4751 0.4289 0.3875 0.3505 0.3173 0.2875 0.2507 0.2386 02149 11 0.8874 0.7885 0.7014 036246 05568 0.4970 0.4440 0.3971 03555 0.3186 0.2858 0 2567 02307 0.2076 0.1339 12 0.8787 0.7730 0.6810 0.6006 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2575 0 2292 0.2042 0.1821 0.1625 13 0.8700 0.7579 0.6511 0.5775 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.23 20 0.2046 0.1807 0.1597 0.1413 14 0.8513 0.7430 0.6419 05583 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.2090 0.1827 0.1599 0.1401 0.1229 15 0.8528 0.7294 0.6232 0.5339 0.4581 0.3936 0.3387 0.2919 0.25 19 0.2176 0.1883 0.1631 0.1415 0.1229 0.1089 16 0.8444 0.7142 0 5050 05134 0.4353 03714 0.3166 02703 02311 0.1978 0.1696 0.1456 0.1252 0.1078 0.0929 17 0.8380 0.7002 0.5874 0.4936 0.4155 03503 0.2959 0250202120 0.1799 0.1528 0.1300 01108 0.0946 0.0838 18 0.8277 0.6864 0.5703 0.4746 0.3957 6.3305 0.2765 0.2317 0.1945 0.1635 0.1377 0.1161 0.0981 0.0829 0.0703 19 0.8195 0.67 30 0.5837 0.4564 0.3769 0.3118 02584 02145 0.1784 0.1496 0.1240 0.1037 0.0868 0.0728 0.0611 20 0.8114 0.6598 0.5375 0.4388 0.3589 02942 02415 0.1987 0.1637 0.1351 0.1117 0.0926 0.0768 0.0638 0.0531 21 0.8934 0.6468 0.5219 0.4220 0.3418 02775 02257 0.1839 0.1502 0.1228 0.1007 0.0826 0.0680 0.0360 0.0462 22 0.7954 05342 05067 0.4057 03256 02618 0.2109 0.1703 0.1378 0.1117 0.0907 0.0738 0.0601 0.0491 0.0402 23 0.7876 0.62 17 0.4919 0.3901 0.3101 0.2470 0.1971 0.1577 0.1264 0.1015 0.08 17 0.0559 0.0532 0.0431 0.034924 0.7198 0.6095 0.4776 0.3751 0.2953 0.2330 0.1842 0.1450 0.1160 0.0923 0.0735 0.0388 0.0471 0.0378 0.0304 25 0.7720 0.59/6 0.4637 03607 0.2812 02198 0.1722 0.1352 0.1064 0.0839 0.0663 0.0525 0.0417 0.6531 0.0254 26 0.7644 0.5859 0.4502 03468 0.2678 0.2074 0.1609 0.1252 0.0976 0.0763 0.0597 0.0489 00369 0.6291 0.0230 27 0.7668 0.5744 0.4371 03335 0.2851 0.1956 0.1504 0.1159 0.0895 0.0693 0.0538 0.0419 0.0326 0.025 0.0200 28 0.7493 0.5631 0.4243 0.3207 0.2429 0.1846 0.1406 0.1073 0.0822 0.0530 0.0485 0.0374 0.0289 0.0224 0.0174 29 0.7419 0.5521 0.4120 0.3083 0 2314 0.1741 0.1314 0.0994 0.0754 0.0573 0.0437 0.0334 0.0256 0.0196 0.0151 30 21 22 23 24 25 26 27 Calculate the NPV of the Electrobicycle project. Be sure to show your NPV calculations. Explain, in your own words, why working capital investments are subtracted each year in the ca Explain, in your own words, the meaning of the required rate of return for the project. Assume the auto company has a required rate of return of 15%. Based on the required rate of r birthday date), is the Electrobicycle project more or less risky than the auto company? Explain y Based on your concluded NPV, should the company invest in this project to build Electrobicycle Today Year 1 Year 2 Year 3 Year 4 Revenues After-tax earnings $1,000 ($500) $3,000 $300 $6,000 $600 Year 5 $12,000 $1,200 $1,500 $100 Project Cash Flow $100 $400 ($500) $400 $300 $400 $600 $400 $1,200 $400 ($2,000) $0 $0 $0 $0 $0 After-tax earnings Plus: Depreciation Less: Cost of plant, equipment Less: Working capital Plus: Recovery of working capital Plus: Salvage value Annual project cash flow ($1,000) ($200) ($200) ($200) ($200) ($200) n/a n/a n/a n/a $2,000 n/a n/a $600 n/a ($300) n/a $500 $300 $800 $4,000 Note: n/a = not applicable