With the response below:

Confirm the calculations or explain a correction to the calculation in the initial post.

Compare how the required rate of return you used differs from your classmate's rate of return.

Explain how the different rate of returns impacted the concluded NPV.

Explain why the salvage value is added to the cash flows in the final year of the project.

Hello, Class,

I have analyzed and determined the financial viability of this large auto company's potential investment in an Electro bicycle project. The project involves producing an electronic, climate-controlled bicycle that has garnered attention for its environmental benefits and potential urban utility.

Net Present Value (NPV) Calculation

To calculate the NPV for the Electro bicycle project, we'll use the cash flows projected over the project's five-year life, as detailed in the provided table. The discount rate, based on my birthday date, is 15%.

Here are the annual project cash flows from the table:

Year 0: $300,000$300,000

Year 1: $300,000

Year 2: $500,000

Year 3: $800,000

Year 4: $4,000,000

The formula for NPV is NPV=Cash Flow(1+) NPV=(1+r) tCash Flowt, Where t is the year and r is the discount rate (15%).

Let's calculate it:

NPV=300,000/(1+0.15)^0 +300,000/(1+0.15)^1 +500,000/(1+0.15)^2 +800,000/(1+0.15)^3 +4,000,000/(1+0.15)^4

NPV=(1+0.15)0300,000+(1+0.15)1300,000+(1+0.15)2500,000+(1+0.15)3800,000+(1+0.15)44,000,000

Therefore, NPV=$3,151,967

Explanation of Working Capital Investments

Working capital investments are subtracted from the cash flows each year because they represent funds tied up in the project's everyday operations that cannot be used for other purposes. These investments cover necessary expenses such as inventory, accounts receivable, and operating cash, ensuring the project has sufficient liquidity to meet its short-term obligations and operational needs.

Meaning of the Required Rate of Return

The required rate of return is a critical financial metric representing the minimum return investors expect to provide capital to a project (Hagel, Brown, and Davidson, 2010). It reflects the risk of the investment, with a higher rate indicating higher risk. This rate is used to discount future cash flows to their present value, helping to assess whether an investment is worthwhile under the risk-return profile.

Risk Comparison Based on Required Rate of Return

Assuming the auto company has a required rate of return of 15% and using the same for the Electro bicycle project based on my birthday date, the project aligns with the company's general risk profile. If the project's required rate of return were different, it would indicate a deviation in risk perception between the project and the company's typical ventures.

Investment Recommendation

Based on the NPV calculation, which I will compute precisely using these inputs, the investment decision will hinge on whether the NPV is positive or negative. A positive NPV suggests that the project's returns exceed the cost of capital, making it a beneficial investment for the company.

Let's calculate the exact NPV using the 15% discount rate to finalize our recommendation.

The calculated Net Present Value (NPV) for the Electro bicycle project is approximately $3,151,967. This positive NPV indicates that the projected returns from the Electro bicycle project exceed the expected returns based on the 15% discount rate, which corresponds to the company's required rate of return.

Conclusion

Given the positive NPV, the auto company should invest in the Electro bicycle project. This decision is justified as the returns cover the cost of capital and provide a substantial margin above it, suggesting a profitable venture that aligns with the company's financial expectations and risk profile. The project's alignment with emerging environmental trends and urban mobility solutions further enhances its strategic value, making it a compelling case for investment based on financial and strategic grounds.