Question
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 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).
a) Calculate the Net Present Value (NPV) and the Internal Rate of Return (IRR)
Present your workings in full and show as a minimum the following: Sales revenue per year Gross profit per year Operating profit per year Net profit per year
Total net cash flows per year
Present Value of cash flows per year NPV and IRR
b) Calculate the Payback Period
Present your workings in full and show as a minimum the following: Sales revenue per year Gross profit per year Operating profit per year Net profit per year Total net cash flows per year Cumulative cash flows per year PP in years and months
Total 10,000 3% 52,500 Table 1: Projections for the electric model (SUV electric) Projected sales and costs Expected sales in units of the SUV electric in year 1 Year-on-year change in sales Selling price per unit of the SUV electric Cost per unit of SUV electric: Labour Material Special battery Annual maintenance and update of software Investment in production line (required in year 0) Training of staff (required in year 0) Working capital required in year and recovered at the end of the project in year 5 Corporation tax rate (reduced for electric vehicles) The tax is paid in cash in the year that the profit is recorded. Cost of capital Duration of the project 10% of selling price 50% of selling price 10% of selling price 250,000 500,000,000 10,000,000 20,000,000 15% 13% 5 yearsStep by Step Solution
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