Question

Part A Capital Budgeting (Show all workings 50 marks) 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. Problem: 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%. (a) Prepare an excel spreadsheet calculating

Answer 1

New Microsoft Office Excel Worksheet Microsoft Excel Formulas Data Home Insert Page Layout Review View Cut Σ AutoSum - A A Wrap Text Calibri General 11 Copy Сopy Fill Merge & Center +.0 .00 .00.0 Paste ÉÈ Conditional Format Sort & Find & Cell Insert Delete Format BIU S % Format Painter Clear Formatting as Table Filter Select Styles Clipboard Cells Editing Font Alignment Number Styles f C4+B5 C5 A B C D E F G H Cash flows Cumulative cash flows 1 Years 2 0 -103000000 -103000000 3 1 29900000 -73100000 4 29550000 -43550000 33267000 5 3 -10283000 4 38022072 27739072 7 5 43573765 71312837 10 Payback period 11 Step 1 Year 3 is the year with the last negative outflow 12 Step 2 Divide the total cumulative flow in the year in which cash flows became positive by the total flow of the consecutive year 0.270448175 13 14 Payback p Step 1 Step 2 3.27 years 15 16 17 18 19 20 21 22 23 Activate Windaws Go to Settings to activate Windows 24 25 Sheeti Sheet2 Sheet4 Sheet5 Sheet3 Sheet6 100% Ready 6:57 PM ENG e O Type here to search IN 9/25/2019 »

The project should be accepted by the management of the company as its Net Present Value (NPV) is positive. The project has the profitability index which is higher than 1, which is a good indicator. Also, the project's payback period is lesser than the life of the project. All these parameters indicate towards the positive implications of undertaking the project. Image 2,3,4 and 5 relate to the first two parts whereas the first and the last image reflect that even in case of rise in variable costs by 10%, the project has a positive NPV and favourable payback period.

Even in case of rise in variable costs by 10%, the projects should be accepted by the management due to positive NPV and favourable payback period.

New Microsoft Office Excel Worksheet Microsoft Excel X Formulas Data Home Insert Page Layout Review View %Cut E AutoSum A A Wrap Text Calibri 11 General ECopy Сopy Fill E Merge & Center Conditional Format Sort & Find & Paste в I U +.0 .00 Cell Insert Delete Format % .00.0 Format Painter Clear Filter Select Editing Formatting as Table Styles Clipboard Font Alignment Number Styles Cells fox 115 A B D F G H J K L M 1 Particulars Years 2 1 2 3 4 5 Depreciation on plant No.of units sold 2,420 3 2,000 2,200 2,662 2,928 4 Selling price per unit 5 Variable cost (60%) Original cost of plant 50,000 52,500 55,125 57,881 60,775 100,000,000 34,729 30,000 31,500 36,465 Useful life 5 years 33,075 6 Add: Increase of 3% 10,000,000 900 972 1,021 1,073 Scrap value 7 Total variable cost 34,047 37,538 30,000 32,400 35,750 Depreciation Method SLM 8 Contribution per unit 21,078 22,131 Yearly depreciation(Original Cost-Scrap value)/Useful life 20,000 20,100 23,238 18,000,000 9 Total contribution 40,000,000 44,220,000 51,008,760 58,912,962 68,044,399 10 Fixed costs 5,000,000 5,412,161 5,100,000 5,202,000 5,306,040 Total initial investment Fixed capital requirement 11 Depreciation 18,000,000 18,000,000 18,000,000 18,000,000 18,000,000 12 Profit before tax 100,000,000 17,000,000 21,120,000 27,806,760 35,606,922 44,632,239 13 Less:Tax @ 30 % Working capital requirement 5,100,000 6,336,000 8,342,028 10,682,076 13,389,672 3,000,000 14 Profit after tax Total 11,900,000 14,784,000 19,464,732 24,924,845 31,242,567 103,000,000 15 Add:Depreciation 18,000,000 18,000,000 18,000,000 18,000,000 18,000,000 16 After tax cash flows 29,900,000 32,784,000 37,464,732 42,924,845 49,242,567 17 18 19 20 21 22 23 Activate Windows Go to Settings to activate Windows 24 25 Sheet1 Sheet2 Sheet3 lIl Ready 100% 6:27 PM ENG е O Type here to search IN 9/25/2019

New Microsoft Office Excel Worksheet Microsoft Excel Formulas Data Home Insert Page Layout Review View Cut E AutoSum A A Wrap Text General Calibri 11 ECopy Fill Соpy E Merge & Center Paste +.0 .00 .00.0 Conditional Format Cell Insert Delete Format Sort & Find & BIU % Format Painter Formatting as Table Styles Clear Filter Select Editing Styles Clipboard Font Alignment Number Cells fox E15 A B C D E G H J K L M N C 1 Particulars Years 2 0 1 2 3 4 5 3 Cash outflows 4 Initial capital investment (100,000,000) (3,000,000) 5 Working Capital 6 Cash inflows 32,784,000 7 After tax cash inflows 37,464,732 29,900,000 42,924,845 49,242,567 8 Recoverable value of plant 10,000,000 (103,000,000) 9 Total cash flows 37,464,732 59,242,567 29,900,000 32,784,000 42,924,845 10 Rate of return 0.045 11 Present value factor 1 0.957 0.916 0.876 0.839 0.802 30,021,291 35,995,116 (103,000,000) 47,539,260 12 28,612,440 32,830,217 13 NPV 71,998,324 14 15 16 17 18 19 20 21 22 23 Activate Windows Go to Settings tolactivate Windows 24 25 Sheet1 Sheet2 Sheet3 Sheet4 lIl 100% Ready 6:35 PM ENG e O Type here to search 9/25/2019 IN

New Microsoft Office Excel Worksheet Microsoft Excel Cn Page Layout Data Home Insert Formulas Review View E AutoSum Cut Calibri A A Wrap Text General 11 ECopy Fill Соpy Merge & Center +.0 .00 .00.0 ÉÈ Conditional Format Sort & Find & Paste Cell Insert Delete Format BIU % Format Painter Clear- Formatting as Table Filter Select Styles Clipboard Cells Editing Font Alignment Number Styles B17 A B C D E F G H Cash flows Cumulative cash flows Years 2 0 -103000000 -103000000 3 1 29900000 -73100000 4 32784000 -40316000 -2851268 5 3 37464732 42924845.11 40073577.11 4 89316144.17 7 5 49242567.07 9 10 Payback period 11 Step 1 Year 3 is the year with the last negative outflow 12 Step 2 Divide the total cumulative flow in the year in which cash flows became positive by the total flow of the consecutive year 0.066424654 13 14 Payback p Step 1 Step 2 + 3.07 years 15 16 17 18 19 20 21 22 23 Activate Windaws Go to Settings to activate Windows 24 25 Sheeti Sheet2 Sheet3 Sheet4 Sheet5 100% Ready 6:38 PM ENG e O Type here to search x IN 9/25/2019 »

New Microsoft Office Excel Worksheet Microsoft Excel Cln Formulas Data Home Insert Page Layout Review View Cut E AutoSum A A Wrap Text General Calibri 11 ECopy Fill Соpy ÈE Merge & Center Paste +.0 .00 .00.0 Conditional Format Cell Insert Delete Format Sort & Find & % BIU Format Painter Clear Filter Select Formatting as Table Styles Editing Alignment Styles Clipboard Font Number Cells fixProfitability index B3 A C D F G J K L M N C P 1 2 Profitability index (NPV+Initial investment)/Initial investment 3 4 Profitability index 1.70 5 7 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Activate Windows Go to Setlting to activate Windows 24 25 Sheet1 Sheet2 Sheet3 Sheet4 Sheet5 Sheet6 100%) Ready 6:40 PM ENG e O Type here to search x IN 9/25/2019