Option 1: a fully electric model - SUV electric The first option is for the car manufacturing company to produce an electric car. This is based on the growing popularity of electric cars and the reduced taxation offered by the government as an incentive to car manufacturers for the production electric vehicles. At the same time, the electric model is expected to have a higher production cost as it will require significant investment to develop the necessary production line. The production will require special software that will need to be maintained and updated every year. Before the production begins, the production staff will need training in the use new production line and the specialist software. The HR team suggests that the company will benefit from this project by building key skills required to produce environmentally friendly vehicles. The investment in the production line equipment and the staff training will be fully depreciated by the end of the project using the straight-line method. The team has produced the following projections for the electric model (SUV electric). Table 1: Projections for the electric model (SUV electric)

Option 2: hybrid model SUV Hybrid The second option is to produce a hybrid electric car. The hybrid option reflects the concerns raised by some older members of the production team about moving to a fully electric model. These experienced mechanics argued that the company's expertise is in producing conventional vehicles, and this should not be abandoned by switching to the production of fully electric vehicles. The production line of the hybrid model will require a lower initial investment than the electric model. Also, since a great part of the hybrid model's technology will be based on the conventional combustion engine, there is no need for staff training. Although estimated to be higher than conventional cars, the year-on-year growth in the sales of hybrid cars is expected to be lower than electric cars. The price of the Hybrid model is lower than the Electric model as it reflects the lower production costs and the market price of similar models. The profit made from the production and sale of hybrid cars is not subject to tax incentives. The investment in the production line equipment will be fully depreciated by the end of the project using the straight-line method. The team has produced the following projections for the hybrid model (SUV Hybrid). Table 2: Projections for the hybrid model (SUV Hybrid)

1) Calculate for both models: a) the Net Present Value (NPV) and the Internal Rate of Return (IRR)

Present your workings in full and show as a minimum the following: Sales revenue per year Gross profit per year Operating profit per year Net profit per year

Total net cash flows per year

Present Value of cash flows per year NPV and IRR

b) the Payback Period for each of the two car models.

Present your workings in full and show as a minimum the following: Sales revenue per year Gross profit per year Operating profit per year Net profit per year Total net cash flows per year Cumulative cash flows per year PP in years and months

Total 10,000 3% 52,500 Projected sales and costs Expected sales in units of the SUV electric in year 1 Year-on-year change in sales Selling price per unit of the SUV electric Cost per unit of SUV electric: Labour Material Special battery Annual maintenance and update of software Investment in production line (required in year 0) Training of staff (required in year 0) Working capital required in year 0 and recovered at the end of the project in year 5 Corporation tax rate (reduced for electric vehicles) The tax is paid in cash in the year that the profit is recorded. Cost of capital Duration of the project 10% of selling price 50% of selling price 10% of selling price 250,000 500,000,000 10,000,000 20,000,000 15% 13% 5 years Total 12,000 1% 31,000 Projected sales and costs Expected sales in units of the SUV Hybrid in Year 1 Year-on-year change in sales Selling price per unit of the SUV Hybrid Cost per unit of the SUV Hybrid: Labour Material Hybrid technology Annual maintenance of production equipment Investment in production line Working capital required in year 0 and recovered at the end of the project in 8% 50% 10% 100,000 410,000,000 15,000,000 year 5 20% Standard corporation tax rate The tax is paid in cash in the year that the profit is recorded. Cost of capital Duration of the project 13% 5 years Total 10,000 3% 52,500 Projected sales and costs Expected sales in units of the SUV electric in year 1 Year-on-year change in sales Selling price per unit of the SUV electric Cost per unit of SUV electric: Labour Material Special battery Annual maintenance and update of software Investment in production line (required in year 0) Training of staff (required in year 0) Working capital required in year 0 and recovered at the end of the project in year 5 Corporation tax rate (reduced for electric vehicles) The tax is paid in cash in the year that the profit is recorded. Cost of capital Duration of the project 10% of selling price 50% of selling price 10% of selling price 250,000 500,000,000 10,000,000 20,000,000 15% 13% 5 years Total 12,000 1% 31,000 Projected sales and costs Expected sales in units of the SUV Hybrid in Year 1 Year-on-year change in sales Selling price per unit of the SUV Hybrid Cost per unit of the SUV Hybrid: Labour Material Hybrid technology Annual maintenance of production equipment Investment in production line Working capital required in year 0 and recovered at the end of the project in 8% 50% 10% 100,000 410,000,000 15,000,000 year 5 20% Standard corporation tax rate The tax is paid in cash in the year that the profit is recorded. Cost of capital Duration of the project 13% 5 years