Please answer the question on tab 1 .and Q 2, please find a response by a peer to the same question onQ 1. Please comment on their response, stating whether you agree or disagree with their answer, and thoughts on their answer.

Q1. You are an expert consultant who has the opportunity to help with a startup funded by an entrepreneur with substantial resources. The company will produce and market revolutionary hybrid cars. Along the way, the company will face many trade offs and will need to perform cost-benefit analyses. Your job is to assist with the design of their capital budgeting system. If you feel that there are important elements of this story that are missing, you should first fill them in with your own (creative) assumptions. Be very clear about these details.Then develop your proposal. Be specific with respect to your recommended methodology, data requirements, and approach.

for Q2

If you feel that there are important elements of this story that are missing, you should first fill them in with your own (creative) assumptions. Be very clear about these details. Then develop your proposal. Be specific with respect to your recommended methodology, data requirements, and approach.

The classic capital budgeting process has three steps: (1) identify the relevant incremental cash flows for the project; (2) calculate a discount rate, also called weighted average cost of capital, kwacc; and (3) calculate the decision criteria: net present value (NPV), profitability index (PI), internal rate of return (IRR), and payback period (PP).

For the hybrid cars, the first investment will likely be in property, plant, and equipment (PPE) in order to produce the vehicles. This will be an expenditure that the capital budgeting process needs to consider in how long it will take to recoup the cash flow expended for the PPE. However, the company may need to produce one or more prototypes before diving into developing say a factory. Prototypes are important because it will give the sales team a product to pre-sale. This way the company can start marketing the hybrids and hopefully take orders. This may increase accounts receivable as another cash flow. Presales may also be helpful in predicting yearly sales revenue.

Were going to need to determine the operating costs next. Here, the size of the factory, staff, location, and other relevant factors will be important. If the company wants to sell hybrids in the North American Market, perhaps Mexico would be an ideal place to build the plant/factory. This is a strategic location where many other automotive companies have plants to service the North American market. The operating costs are lower in Mexico and the transportation expense to deliver the vehicles to the sales and marketing locations is also lower than if the hybrids were built in say the United States.

A discount rate is needed before you can perform the present value calculations. Here we need to know if the entrepreneur intends to borrow money or self fund the project. In the case where he or she wants to borrow, the interest rate and income tax rate are involved in this calculation. If this project is self-funded, then we dont need a coupon rate and can assume the normal income tax rate. For the Cost of Equity analysis, wed calculate that as RISK-FREE-RATE + (BETA x RISK PREMIUM). COE will be higher if the project is self funded.

Finally, well use the following four decision criteria: (1) Net Present Value (NPV); (2) Profitability Index (PI), also called Benefit-Cost Ratio (BCR); (3) Internal Rate of Return (IRR); and (4) Payback Period (PP).