Question

Company Background 

Middle River Automotive, LLC (MRA) is a company that was established in 2017 with the goal of designing, developing, manufacturing, and selling both hybrid and fully electric cars and light trucks. The company’s corporate and design headquarters are in Baltimore, MD. In 2018, the company acquired several decommissioned assembly plants in nearby Middle River, MD, previously owned by Martin Marietta, Corp., an aerospace manufacturing company later acquired by Lockheed Martin. MRA has spent the past 18 months renovating and updating these facilities in anticipation of using them to manufacture electric vehicles. The cost of these renovations thus far has been approximately $1 billion.

> assumptions. What is the NPV break-even level of YoY drop in average selling price beyond
Year 1. Again, hold all other assumptions constant.
4. MRA anticipates gross margin to increase from 5% in Year 1 of production to 20% by Year 3
of production due to efficiency gains in production processes as well as lower production
costs. However, there is some concern that these estimates are too optimistic. Holding
our gross margin estimates constant in the first 2 years of operations, what is the NPV
break-even level of gross margin that must be achieved by Year 3 of operations and
maintained for the remainder of the project’s life.
5. In order to incentivize investment in “green” industry, the government has made additions
to the corporate tax code that it hopes will encourage investment in these types of
companies. Recently-passed legislation allows investments in electric vehicle production
to utilize and benefit from an accelerated depreciation schedule. This legislation allows
50% of the cost of any capex investment to be depreciated in its first year (Year 1). The
remaining 50% will be depreciated evenly over the original assumed depreciable life. What
is the NPV of the Pegasus project using these updated depreciation assumptions? Despite
this recently passed tax legislation, MRA still plans on using straight-line depreciation for all
of its accounting. Which depreciation method should you utilize in your FCF and NPV
analysis?
6. What is the IRR of this project? Provide your answer to 1 decimal place (0.1%).