Tesla is about to undertake an investment to produce an enhanced version of its Cyber Truck. The project requires an initial fixed asset investment of $300 million and will last for 15 years. The fixed asset will be depreciated straight-line to zero over its useful life. The scrap value of the fixed asset is zero. The fixed cost of the project is $25 million per year. It costs $70,000 to produce a cyber truck. The marketing department thinks that they can sell each truck for $95,000. Assume that Tesla can produce and sell the same number of trucks each year. The corporate tax rate for the current year is 22%. 

a. Elon Musk wants to finance this project with equity financing. Currently, the risk-free rate is 4% and the market risk premium is 7%. Tesla has a beta of 1.5. Calculate the appropriate cost of capital for the Cyber Truck project. 

b. Using the discount rate that you find in (a), calculate the break-even level of sales (number of truck sold per year) that leads to zero NPV.

Answer rating: 100% (QA)

a Use CAPM to find the cost of capital as Here Rf 4 ERm Rf 7 Beta 15 ERi 4 15 7 145 b The NPV will b... View the full answer