As a Financial Analyst in the Finance Department of Zeta Auto Corporation, you are recently hired...
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As a Financial Analyst in the Finance Department of Zeta Auto Corporation, you are recently hired in which is seeking to expand production. The CFO asks you to help decide whether the firm should set up a new plant to manufacture the roadster model, the Zeta Spenza. Steps to Completion: Capital Investment Data To assess the suitability of the project you begin by listing the various cash flows. A consultant has been paid $50,000 to do a market survey. She reports back that Zeta can sell 7,000 Spenza's for $80,000 each in years 1 and 2, and 4,000 Spenza's for $80,000 each in years 3 and 4. The consultant also estimates that the increased sales of the Spenza will cannibalize the sale of an existing model, the Zeta Monza, resulting in 1,000 fewer units of the Monza sold in each of the 4 years. Monza's are priced at $65,000. After 4 years it is expected the Spenza will be phased out, and the plant will be put to other uses generating $15 M annually. However, this decision can be reevaluated at the end of year 3, based on new information which will become at that time. Your consultant has prepared her estimates of what this new information might be. The cost of setting up the plant is to be $250 M with annual manufacturing capacity of 10,000 cars. In addition, at the beginning of each year the plant will require the Net Working Capital outlay equal to 4.75% of direct manufacturing costs (excluding labor and overheads) in the coming year. The NWC outlay will be recovered after 4 years. The CFO provided you with historical information about Monza's cost structure and noticed that Spenza will have the following differences: • Spenza's body will be made from reinforced carbon, which makes the car lighter, thus significantly improving mileage range per battery charge. 80% of the carbon cost is the cost of energy and the estimated carbon cost body per car of $14,000 is based on electricity cost of 7 cents /per kWh, which is the current cost of electricity in Michigan, where the plant will be located. This cost is 70% of the average nationwide retail electricity price. EIA electricity cost projections are provided in the Excel sheet. Battery Pack cost for Spenza is $15,000 per car. Cost of materials for engine and other parts will be identical to Monza's. ● • Labor cost of $4,000 per car is based on annual production of 10,000 Spenza's. Labor is unionized; number of workers and wages do not depend on the number of units produced. • Overheads at the new plant will be identical to total overheads at the existing Monza plant. IRS allows you to straight line depreciate the cost of the plant over 4 years for tax purposes (equal depreciation in all years and not an accelerated schedule of depreciation). You have a choice to use 3 year MACRS depreciation schedule) If you recommend setting up the plant, you should also consider that the plant will require land which the firm can put to other uses. These alternative uses will earn the firm $15 M annually. Modeling Financial Metrics and Cash Flows Depreciation You have to decide whether Zeta should set up the plant to produce the Spenza's by answering the following series of questions. After having enumerated the various cash flows you are now ready to analyze the project using capital budgeting techniques and project analysis methods. • What will be the depreciation for tax purposes from the investment in the Spenza plant using the straight line method? As a Financial Analyst in the Finance Department of Zeta Auto Corporation, you are recently hired in which is seeking to expand production. The CFO asks you to help decide whether the firm should set up a new plant to manufacture the roadster model, the Zeta Spenza. Steps to Completion: Capital Investment Data To assess the suitability of the project you begin by listing the various cash flows. A consultant has been paid $50,000 to do a market survey. She reports back that Zeta can sell 7,000 Spenza's for $80,000 each in years 1 and 2, and 4,000 Spenza's for $80,000 each in years 3 and 4. The consultant also estimates that the increased sales of the Spenza will cannibalize the sale of an existing model, the Zeta Monza, resulting in 1,000 fewer units of the Monza sold in each of the 4 years. Monza's are priced at $65,000. After 4 years it is expected the Spenza will be phased out, and the plant will be put to other uses generating $15 M annually. However, this decision can be reevaluated at the end of year 3, based on new information which will become at that time. Your consultant has prepared her estimates of what this new information might be. The cost of setting up the plant is to be $250 M with annual manufacturing capacity of 10,000 cars. In addition, at the beginning of each year the plant will require the Net Working Capital outlay equal to 4.75% of direct manufacturing costs (excluding labor and overheads) in the coming year. The NWC outlay will be recovered after 4 years. The CFO provided you with historical information about Monza's cost structure and noticed that Spenza will have the following differences: • Spenza's body will be made from reinforced carbon, which makes the car lighter, thus significantly improving mileage range per battery charge. 80% of the carbon cost is the cost of energy and the estimated carbon cost body per car of $14,000 is based on electricity cost of 7 cents /per kWh, which is the current cost of electricity in Michigan, where the plant will be located. This cost is 70% of the average nationwide retail electricity price. EIA electricity cost projections are provided in the Excel sheet. Battery Pack cost for Spenza is $15,000 per car. Cost of materials for engine and other parts will be identical to Monza's. ● • Labor cost of $4,000 per car is based on annual production of 10,000 Spenza's. Labor is unionized; number of workers and wages do not depend on the number of units produced. • Overheads at the new plant will be identical to total overheads at the existing Monza plant. IRS allows you to straight line depreciate the cost of the plant over 4 years for tax purposes (equal depreciation in all years and not an accelerated schedule of depreciation). You have a choice to use 3 year MACRS depreciation schedule) If you recommend setting up the plant, you should also consider that the plant will require land which the firm can put to other uses. These alternative uses will earn the firm $15 M annually. Modeling Financial Metrics and Cash Flows Depreciation You have to decide whether Zeta should set up the plant to produce the Spenza's by answering the following series of questions. After having enumerated the various cash flows you are now ready to analyze the project using capital budgeting techniques and project analysis methods. • What will be the depreciation for tax purposes from the investment in the Spenza plant using the straight line method?
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Related Book For
Accounting Tools for Business Decision Making
ISBN: 978-1118128169
5th edition
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso
Posted Date:
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