Uber is considering investing in an autonomous fleet of 1,000 delivery drones, each priced at $50,000 to

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Question:

Uber is considering investing in an autonomous fleet of 1,000 delivery drones, each priced at $50,000 to manufacture today. The project will also cost $3,000,000 in AI software development now and $2,000,000 six months from today. The drones are expected to generate semi-annual revenue, starting at 25% of manufacturing cost, 12 months from today. Revenue is forecasted to grow at 10% p.a. for the first two years of revenue, dropping to 6% p.a. for each year after. Drone operating costs are expected to be 10% of revenue. In the second year of the project, all drones will be serviced with labour and replacement parts costing 15% of the manufacture price. The project will be terminated after a total of 3 years of revenue. In the final year of revenue, the entire fleet is expected to be scrapped, yielding 5% of the manufacture price. Uber is financed 75% through debt which has a cost of 6% and shareholders expect a 6% premium on what capital creditors earn.

a)Determine a required rate of return to be used in the analysis of this project.

b)Set out the project timeline complete with cash inflows, outflows, net cash flow by year and discount formula with substitutions.

c)Determine the NPV and IRR of the project. Would you recommend accepting the project?

d)The CFO is considering increasing the proportion of debt financing in an attempt to lower the weighted average cost of capital (WACC). Explain whether WACC can be lowered by increasing the proportion of debt financing.