Ze-Bikes, Ltd (ZB) is a company that has been selling e-bikes for the past 10 years. They are now considering a new generation of e-bikes, a "Ze-Bike". These Ze-bikes are more efficient and require less electricity; 1) they have extendable solar panels that can charge the bike even when riding, and 2) it uses a "hybrid" technology that charges the bike when going downhill.

Undertaking this new bike would require new machinery, and six small 3D printers to print parts. Ze-Bike wants to remain competitive and therefore expects that if the product sells well, they will want to produce an upgraded version of the bike in 6 years and cease producing the original model.

You have worked for ZB for a year now, and your manager has asked you to help analyse the potential new product. Your team has collected the following estimations and grouped them into two areas: 1) Revenue & Costs, and 2) Capital Expenditures (Machinery and 3-day printers).

1. Revenue & costs

? ZB conducted market research (costing $40,000) showing that annual sales are expected to be around 9,000 Ze-Bikes in the first year and is expected to grow at 12% per year over the next six years. It has also invested $80,000 in R&D to come up with the design and technology for the Ze-Bike.

? Each Ze-Bike will be sold for $4000 in the first year. The price will increase at the inflation rate over the next six years.

? If the new Ze-Bike launched, ZB estimates that net revenue from their existing e-bikes will decrease by $5,000,000 per year (5,000 bikes *$1000 per bike).

? Variable costs of production are $1000 per bike for the first year. The costs will increase at the inflation rate over the next six years.

? Fixed costs of production are $1,000,000 per year.

? Administrative costs for the company will increase by $180,000 per year because of the new product line. However, this new line of bike production will be charged with an annual share of the business's administrative costs, totalling $100,000 per year.

? If ZB launches the new bike, they will increase their box order with CustomBoxCo, reducing their per-unit box cost on other product lines. This is estimated to save $30,000 per year.

? The company will produce its product in a part of their current factory, which it currently rents out for $160,000 per year.

? To finance this new production line, the company will borrow part of the capital required from the bank, with an interest cost of $24,000 per year.

2. Capital Expenditures

? The bike solar panel assembly system will cost $12,400,000. At the end of 6 years, the solar panel is estimated to be sold for $3,000,000.

? ATO regulations require depreciation over 20 years to zero using the straight-line method.

? The hybrid technology machine will cost $5,000,000. At the end of 6 years, the machine is expected to be sold for $2,500,000.

? ATO regulations require depreciation over 10 years to $100,000 using the straight-line method.

? The total cost of the six required 3D printers is $3,350,000. At the end of 6 years, the estimated value of the 3D printers is $2,200,000 and will be sold.

? ATO regulations require depreciation over 10 years to zero using the straight-line method.

Additional Information:

? The project will require working capital of $15,000 which will be recovered at the end of the 6-year life of the project.

? ZB faces a corporate tax rate of 30%.

? ZB estimates the cost of capital for this project at 17%.

? ZB's policy is to reject projects with a payback period of more than 4 years.

? Inflation rate is expected to be 3%.

Required:

Data Given Year 1 Annual Growth 3 Sales in Units 4 Revenue per unit 5 Variable cost per unit Fill out raw data from the task sheet Category (e.g. side effect) Make the cell red if you think the item is not-relevant for your analysis Lost/increased sales Administrative Costs Fixed Costs 0 Boxes 11 Rent Market Research Report 13 R&D 4 Interest 15 Working Capital 16 17 Capital Expenditure Solar Panel assembly Hybrid technology 3D printers 18 system machine 19 Initial Cost 20 Depr life 21 End of life book value Value at year 6 23 24 25 Inflation 26 Required return 28 29 30 NPV 2 IRR 33 34 35 36 Net Proceeds at end of project (year 6) Solar Panel assembly Hybrid technology 3D printers system machine 8 Initial Cost make calculations or refer to cells above 39 Useful Lifespan O End of life value 41 Annual Depreciation 43 After tax cash flow from Sale of Asset in Year X 44 Initial Cost 5 Accum. Depn Net Book Value 47 Sales Proceeds 48 49 Tax 50 51 Net Cash Flow in Year 6 (= Proceeds - Tix)0 1 2 W 5 W NH Revenue Variable Costs Other relevant CFs (side effects, opportunity costs, etc.) Less: Admin expenses Earnings before interest, tax, depreciation and amortisation (EBITDA) Less: Depreciation: Solar Panel Assembly System Less: Depreciation: Hybrid technology machine 9 Less: Depreciation: 3D printers 10 Earnings before interest and tax (EBIT) 1 Tax (EBIT x tax rate) 12 Net operating profit after tax (NOPAT) 13 Add: Depreciation: Solar Panel Assembly System 14 Add: Depreciation: Hybrid technology machine 15 Add: Depreciation: 3D printers 16 Operating Cash Flows (OCF) 17 18 Capital Expenditures (Solar Panel Assembly System) 19 Capital Expenditures (Hybrid technology machine) 20 Capital Expenditures (3D printers) 21 Additions to working capital 22 After-tax FCF 23 24 NPV 25 IRR 26 Payback