Scenario and Assignment Details

Elon Motors produces electric automobiles. In recent years, they have been making all components of the cars, excluding the batteries for each vehicle. The company's leadership team has been considering the ways to reduce the cost of producing its cars. They have considered various options, and believe that they could reduce the cost of each car if they produce the car batteries instead of purchasing them from their current vendor, Avari Battery Company.

Currently, the cost of each battery is $300 per unit. The company feels that they could greatly reduce the cost if the production team makes each battery. However, to produce these batteries, the company will need to purchase specialized equipment that costs $1,670,000. However, this equipment will have a useful life of 10 years, and is expected to have a salvage value of $99,700 at the end of that time.

Currently, the company purchases 2,500 batteries per year, and the company expects that the production will remain the same for the coming 10-year period. To make the batteries, the company expects that they will need to purchase direct materials at a cost of $100 per battery produced. In addition, the company will need to employ two production workers to make the batteries. The workers likely work 2,080 hours per year and make $25 per hour. In addition, health benefits will amount to 20% of the workers' annual wages. In addition, variable manufacturing overhead costs are estimated to be $20 per unit.

Because there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted. The company's cost of capital (hurdle rate) has been determined to be 12% for all new projects, and the current tax rate of 21% is anticipated to remain unchanged. The pricing for the company's products as well as number of units sold will not be affected by this decision. The straight-line depreciation method would be used if the new equipment is purchased.

Required Items

Based on the above information and using the provided Excel Template, calculate the following items for this proposed equipment purchase.

• Annual cash flows over the expected life of the equipment
• Payback period
• Accounting rate of return
• Net present value
• Internal rate of return
• Modified Internal rate of return

Do you recommend the acceptance of this proposal? Why or why not?

Prepare a two-page minimum, double-spaced Word paper elaborating on and supporting your answer. Be sure to follow APA formatting, as applicable.

Grading Criteria and Submission

The following list, with its five sections and mechanics, shows the Course Project grading criteria. Each section, including mechanics, is worth a total of 20 points each. The entire Course Project is worth 120 points total.

• Section 1: Calculation of the annual cash flows over the life of the equipment
• Section 2: Calculation of the payback period and accounting rate of return
• Section 3: Calculation of the net present value
• Section 4: Calculation of the IRR and modified IRR (MIRR)
• Mechanic: Use Excel formulas throughout the worksheet to determine results. In addition, the Excel template is properly formatted and presented without unnecessary notations. For the written portion, rules of grammar, usage, and punctuation are followed. Spelling is correct. Sentences are well-constructed with consistently strong, varied sentences.