Case 2 - Tesla's Cyberquad PART 1: In the end of 2021, Tesla launched the Cyberquad ATV for kids for $1,9000. It quickly sold out. However, it was recalled in October 2022 when a 36-year-old was injured riding it. Despite the hiccup, Tesla is now assessing a Cyberquad ATV for adults and they need your help! Tesla has already spent $2.25 million to develop a prototype of the Cyberquad ATV for adults and an additional $400,000 in research and development. Buyers can usually expect ATVs to cost anywhere between $3,000 to $15,000 dollars. Tesla believes that the adult Cyberquad ATV should sell for $9,999. Tesla doesn't have much experience producing ATVs, and being an electric ATV will have a host of challenges involved in giving the consumer what they want in an off-road vehicle. Tesla thinks the variable costs will be around $7,800. Fixed costs for the ATV production are $9.5 million. For the sake of the analysis, the project starts "now" in January 2023(t=0) and will end at the end of 2028(t=6). By the end of the first year, Tesla thinks they can sell 7,000 ATVs. They expect sales growth of 15% for the following 5 years. The tooling and equipment required for producing the ATV will cost around $41.5 million. The tooling and equipment are classified as seven-year assets and will be depreciated using Modified ACRS depreciation (see Table 10.7 in the textbook); no bonus depreciation will be used. In 6 years, when they expect the project to end or retire for a new model of the ATV, the estimated market value of the equipment will probably be $5.7 million. These Qauds need charging! Tesla thinks that Cyberquads will often be bought with Powerwalls. Afterall, Cyberquads are likely to be purchased by already existing Tesla owners or Tesla Cybertruck buyers. Why not add a Powerwall while you are at it? Maybe around 30% of the Cyberquads will be also include a Powerwall sale. While a one-battery Powerwall usually sells for $11,500, Tesla will offer a discount of 20% if you buy a Powerwall with your Cyberquad. Variable costs for the Powerwalls are $7,900. There are no fixed costs, investments in NWC, or capital expenditures associated with the additional Powerwall sales. Net working capital for the adult Cyberquad ATV will be 26% of Cyberquad sales and will occur with the timing of the cash flows for the year. That means there is no initial outlay for NWC at t=0, but changes in NWC will first occur at the end of 2023 with the first year's sales. Tesla's tax rate is 11% and they have a required return of 20%. a. What is the payback period of the adult Cyberquad ATV? b. What is the profitability index of the project? c. What is the IRR of the project? d. What is the NPV of the project? e. Based on your answers for a-d, what would you suggest Tesla do knowing that Elon is VERY determined to get the adult Cyberquad ATV to the market? PART 2: Tesla is unsure about their sales projections. They aren't big spenders in terms of marketing research. The Cyberquad ATV for kids sold out very quickly, but that was a lower price point gimmickier endeavor. Their projections for the number of ATVs sold is based on their prediction they could be about 2.5% of the US ATV market, but these projections are uncertain. Tesla wants you to analyze how changes in the price of the ATV as well as changes in the quantity sold will affect the NPV of the project. a. How sensitive is the NPV to changes in price? b. How sensitive is the NPV to changes in quantity sold? (Change each year's sales quantity by the same \%.) c. Based on a and b, what additional information would you give Tesla that might help them make a decision regarding the Tesla Cyberquad. Case 2 - Tesla's Cyberquad PART 1: In the end of 2021, Tesla launched the Cyberquad ATV for kids for $1,9000. It quickly sold out. However, it was recalled in October 2022 when a 36-year-old was injured riding it. Despite the hiccup, Tesla is now assessing a Cyberquad ATV for adults and they need your help! Tesla has already spent $2.25 million to develop a prototype of the Cyberquad ATV for adults and an additional $400,000 in research and development. Buyers can usually expect ATVs to cost anywhere between $3,000 to $15,000 dollars. Tesla believes that the adult Cyberquad ATV should sell for $9,999. Tesla doesn't have much experience producing ATVs, and being an electric ATV will have a host of challenges involved in giving the consumer what they want in an off-road vehicle. Tesla thinks the variable costs will be around $7,800. Fixed costs for the ATV production are $9.5 million. For the sake of the analysis, the project starts "now" in January 2023(t=0) and will end at the end of 2028(t=6). By the end of the first year, Tesla thinks they can sell 7,000 ATVs. They expect sales growth of 15% for the following 5 years. The tooling and equipment required for producing the ATV will cost around $41.5 million. The tooling and equipment are classified as seven-year assets and will be depreciated using Modified ACRS depreciation (see Table 10.7 in the textbook); no bonus depreciation will be used. In 6 years, when they expect the project to end or retire for a new model of the ATV, the estimated market value of the equipment will probably be $5.7 million. These Qauds need charging! Tesla thinks that Cyberquads will often be bought with Powerwalls. Afterall, Cyberquads are likely to be purchased by already existing Tesla owners or Tesla Cybertruck buyers. Why not add a Powerwall while you are at it? Maybe around 30% of the Cyberquads will be also include a Powerwall sale. While a one-battery Powerwall usually sells for $11,500, Tesla will offer a discount of 20% if you buy a Powerwall with your Cyberquad. Variable costs for the Powerwalls are $7,900. There are no fixed costs, investments in NWC, or capital expenditures associated with the additional Powerwall sales. Net working capital for the adult Cyberquad ATV will be 26% of Cyberquad sales and will occur with the timing of the cash flows for the year. That means there is no initial outlay for NWC at t=0, but changes in NWC will first occur at the end of 2023 with the first year's sales. Tesla's tax rate is 11% and they have a required return of 20%. a. What is the payback period of the adult Cyberquad ATV? b. What is the profitability index of the project? c. What is the IRR of the project? d. What is the NPV of the project? e. Based on your answers for a-d, what would you suggest Tesla do knowing that Elon is VERY determined to get the adult Cyberquad ATV to the market? PART 2: Tesla is unsure about their sales projections. They aren't big spenders in terms of marketing research. The Cyberquad ATV for kids sold out very quickly, but that was a lower price point gimmickier endeavor. Their projections for the number of ATVs sold is based on their prediction they could be about 2.5% of the US ATV market, but these projections are uncertain. Tesla wants you to analyze how changes in the price of the ATV as well as changes in the quantity sold will affect the NPV of the project. a. How sensitive is the NPV to changes in price? b. How sensitive is the NPV to changes in quantity sold? (Change each year's sales quantity by the same \%.) c. Based on a and b, what additional information would you give Tesla that might help them make a decision regarding the Tesla Cyberquad