Capital Budgeting Background:
(EV) GOGreen Motors is considering a new project to produce electric vehicles for the Australian domestic market and international markets. The potential growth in this market has been outlined in a report by Climateworks, which you can view by CLICKING HERE. (https://www.climateworksaustralia.org/sites/default/files/documents/publications/ climateworks_australia_state_of_electric_vehicles2_june_2018.pdf) GOGreen has identified a property/plant that was formerly used to build petrol fueled motor vehicles that could be refitted at minimal cost to manufacture the new EV’s.
GOGreen is targeting Australian metrolpolitan centres for initial sales and expanding into regional centres over the next five years. International demand for EV’s is being driven by China and GOGreen has been in negotiation to provide vehicles to the Chinese market in 2020.
GOGreen has made the following projections:
- In the first year 2,000 units will be sold, growing at 10% per annum.
- The price for each unit in the first year will be AU$50,000. This price will increase each year by 5%.
- Variable costs are 60% of the sales price, which will grow by 3% each year.
- Fixed costs are $5 mil pa, which are expected to grow by 2% each year.
- The project is for a term of 5 years. The projected growth of the EV line is expected to outgrow the plant at this time, hence the plan will be sold at the end of 5 years.
- Initial investment into manufacturing equipment of $100 million;equipment may be depreciated at 20% straight-line (prime cost) method.
- In 5 years, the plant will be worth 10% of its’ purchase price.
- Working capital $3 million.
- GOGreen’s required rate of return is 4.5%.
- The tax rate for GOGreen is 30%.
- Prepare an excel spreadsheet calculating:
- After-tax cash flows (in table format)
- Payback period
- Net present value
- Profitability index
- It has come to your attention that variable costs are anticipated to rise by 10% per annum due to the prospective growth within the industry. Would you recommend to proceed with the project? (Show all calculations).
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