Butch T. Automotive, Inc. (henceforth ‘Butch Auto’ or ‘the company’) is an American automotive retailer located in Pullman, WA. The company’s president, Jack Reacher, founded Butch Auto almost 20 years ago, in 2003. When the company was first founded, it focused on producing high-end batteries for automobile manufacturers. The company continues to manufacture these batteries today, part of its core business practices, which account for about 50% of its total revenue. Noticing a shift in the automotive market, the company recently expanded into the business of manufacturing its own fully electric vehicles. 

You and your team, the Carson College of Business graduates, are hired by the company’s finance department to evaluate a new project for the company. As of now, Butch Auto’s only fully electric car model is a midsize SUV called the “Model-Coug” (henceforth ‘Model-C’), and sales have not been excellent. Butch Auto’s main competitor in the electric car market is Tesla, Inc (TSLA). Butch Auto’s Model-C is like the Tesla Model X, but it has a shorter driving range and worse performance in safety tests. However, Butch Auto wants to incorporate a new luxury vehicle, the Model-CougXX (henceforth ‘Model-CXX’) into their lineup. Butch Auto spent $2 million to develop new features and luxury technology, like quicker acceleration, multi-day driving range, and a hyper-sport mode, which were all incorporated in the new Model-CXX design, making it more high-end and desirable than the current Model-C. The company spent an additional $1.1 million on a marketing research study to determine the new car’s expected sales figures. Butch Auto can manufacture the new vehicle, Model-CXX, for $60,000 per unit in variable costs. Fixed costs for the operation are estimated to run $55 million per year. The estimated sales volumes (in units) are 17,000, 12,000, and 9,000 vehicles per year for the next three years, respectively. The unit price (per vehicle) of the new car, Model-CXX, will be $68,000. The necessary equipment can be purchased for $35 million and will be depreciated on a five-year MACRS schedule. 

It is believed the market value of the equipment in three years will be $1.5 million. As previously stated, Butch Auto currently manufactures the Model-C. Due to poor sales, production of the existing product is expected to be terminated in two years. If Butch Auto does not introduce the new Model-CXX vehicle, sales of the existing product will be 10,000 and 9,000 units per year for the next two years, respectively. The price of the current vehicle, Model-C, is $40,000 per unit/car, with variable costs of $35,000 each and fixed costs of $30 million per year. If Butch Auto does introduce the new Model-CXX vehicle, sales of the existing automobile will fall by 5,000 units per year, and the price of the existing automobile, the Model-C, will have to be lowered to $36,000 per vehicle. Net working capital for the new project will be 1% of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in Year 1 with the first year’s sales. Butch Auto has a 20% corporate tax rate. The company has a target debt to equity ratio of 0.5 and is currently A rated (according to S&P 500 ratings). The overall cost of capital for Butch Auto is 10% The finance department of the company has asked you to prepare a report to Jack, the company’s CEO, and the report should answer the following questions.
Can you prepare the income statement and the total cash flow (CFFA) table for this new project?