Question

CarGenie, an automobile manufacturer, wants to offer a one-time line of specialized vehicles. To produce the vehicles, CarGenie will need to invest $20 million upfront on January 1, 2019 in inventory (the only expense in producing the vehicles). CarGenie expects that once they begin production it will take 4 years to produce the vehicles. Over the course of the four years, customers will be able to reserve a vehicle with a down payment. Thus, CarGenie expects this project to have cash inflows of $5 million during the first year, $ 7 million during the second year, $8 million during the third year, and, finally, $25 million during year 4 when they deliver the vehicles. Thus, the project results in income of approximately $25 million over the four years. CarGenie needs to finance the entire $20 million initial amount to fund their project. CarGenie has five options for financing: Long-term Note, Bond A, Bond B, Bond C, and a Stock Issuance.

Please read the introduction and respond to which financing option the firm should use. I believe it will only take a second to complete, I am just confused! Thank you so much I am desperate for a quick response!

Answer 1

Bond A Stock insurance Value in '000 PV Inflow Year 0 0 0 0 Assume Discount rate 10% Value in'000 PV 5000 4545 7000 5785 8000 6011 25000 17075 45000 33416 Long term note Value in'000 PV 1 5460 4964 5460 4513 5460 4102 5460 3730| PV of outflows 21842 17309 NPV 16108 nm + Value in'000 PV 464 422 464 383 464 349 23200 15846 24592 17000 16417 3 27752 27752 PV of outflows PV of outflows 18955 18955 14461 PV of inflows NPV NPV Note: the company should choose Bond B as an option as it gives maximum Net present value. Bond B Value in'000 PV 1424 1295 1424 1177 1424 1070 4 17800 12158 PV of outflows 22072 15699 NPV 17718 Bond C Value in'000 PV 1 1000 909 2 1000 826 1000 751 20000 13660 PV of outflows 23000 16147 NPV 17269 nm + Assumption: we have assumed the discount rate to be 10% while calculations NPV =PV of inflow- PV of Outflow PV= Amount/(1+discount rate) period