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(solution) let me know I will increase the price if you really solve the


let me know I will increase the price if you really solve the problem.


Introduction:

 

You have recently been hired as a Financial Analyst in the Finance Department of Zeta Auto

 

Corporation which is seeking to expand production. The CFO asks you to help decide whether

 

the firm should set up a new plant to manufacture the roadster model, the Zeta Spenza.

 

Deliverable:

 

Write a report providing the CFO with your recommendation whether Zeta should set up the

 

plant to produce the Spenza?s and support your recommendation by in-depth analysis in Excel. In

 

your report, explain the results of each portion of your analysis (represented by the tabs on the

 

Excel template). Submit all the completed Excel worksheets with the completed responses to the

 

questions posed to support your report and recommendation. Provide a one-page Executive

 

Summary summarizing the results of your analysis and recommendation.

 

Steps to Completion:

 

Capital Investment Data

 

To assess the suitability of the project you begin by listing the various cash flows. A consultant

 

has been paid $50,000 to do a market survey. She reports back that Zeta can sell 7,000 Spenza?s

 

for $80,000 each in years 1 and 2, and 4,000 Spenza?s for $80,000 each in years 3 and 4. The

 

consultant also estimates that the increased sales of the Spenza will cannibalize the sale of an

 

existing model, the Zeta Monza, resulting in 1,000 fewer units of the Monza sold in each of the 4

 

years. Monza?s are priced at $65,000.

 

After 4 years it is expected the Spenza will be phased out, and the plant will be put to other uses

 

generating $15 M annually. However, this decision can be reevaluated at the end of year 3, based

 

on new information which will become at that time. Your consultant has prepared her estimates

 

of what this new information might be. These estimates are given in the attached Excel

 

spreadsheet.

 

The cost of setting up the plant is to be $250 M with annual manufacturing capacity of 10,000

 

cars. In addition, at the beginning of each year the plant will require the Net Working Capital

 

outlay equal to 5% of direct manufacturing costs (excluding labor and overheads) in the coming

 

year. The NWC outlay will be recovered after 4 years.

 

The CFO provided you with historical information about Monza?s cost structure (Excel sheet

 

attached) and noticed that Spenza will have the following differences: Spenza?s body will be made from reinforced carbon, which makes the car lighter, thus

 

significantly improving mileage range per battery charge. 80% of the carbon cost is the

 

cost of energy and the estimated carbon cost body per car of $14,000 is based on

 

electricity cost of 7 cents /per kWh, which is the current cost of electricity in Michigan,

 

where the plant will be located. This cost is 70% of the average nationwide retail

 

electricity price. EIA electricity cost projections are provided in the Excel sheet.

 

Battery Pack cost for Spenza is $15,000 per car.

 

Cost of materials for engine and other parts will be identical to Monza?s. Labor cost of $4,000 per car is based on annual production of 10,000 Spenza?s. Labor is

 

unionized; number of workers and wages do not depend on the number of units produced.

 

Overheads at the new plant will be identical to total overheads at the existing Monza

 

plant. IRS allows you to straight line depreciate the cost of the plant over 4 years for tax purposes

 

(equal depreciation in all years and not an accelerated schedule of depreciation). You have a

 

choice to use 3 year MACRS depreciation schedule (see the Excel sheet attached)

 

If you recommend setting up the plant, you should also consider that the plant will require land

 

which the firm can put to other uses. These alternative uses will earn the firm $15 M annually.

 

Modeling Financial Metrics and Cash Flows

 

Depreciation

 

You have to decide whether Zeta should set up the plant to produce the Spenza?s by answering

 

the following series of questions. After having enumerated the various cash flows you are now

 

ready to analyze the project using capital budgeting techniques and project analysis methods. What will be the depreciation for tax purposes from the investment in the Spenza plant

 

using the straight line method? What will be the depreciation using MACRS? Which

 

schedule would you recommend to use? EBIT What will be the costs and revenues for the first four years? What will be the incremental

 

EBIT (Earnings before Interest and Taxes) each year?

 

Interest and Taxes

 

You now have to need to determine interest costs and taxes. Assume that the cost of setting up

 

the plant will be 50% financed by debt with an interest rate of 7%.

 

At this point you are getting closer to the cash flows the project will produce, and need to

 

determine the tax rate. You research tax rates and determine that the appropriate tax rate is 40%. What incremental taxes Zeta will pay if the Spenza plant is set up? Net Income What will be the incremental Net Income for Zeta from the project each year?

 

Incremental OCF

 

Now you can calculate the net increase in cash flows from the project. What will be the incremental OCF (Operating Cash Flow) each year? Free Cash Flow

 

The next step will be calculating FCF taking into account OCF and other incremental cash flows,

 

including opportunity costs! At this point we are still assuming that the project will last only for

 

four years. What will be the FCF (Free Cash Flow) each year? WACC and CAPM

 

The next step will be estimating WACC. Using Yahoo Finance! or other financial sources

 

available on the course website find auto-making industry?s beta, market risk premium and the

 

risk free rate. Estimate the WACC using the earlier assumption about the project?s financing and the

 

CAPM equation for the cost of equity. Decision Criteria ? NPV and IRR

 

Now you are ready to calculate the first criterion that is used to assess projects. What will be the Net Present Value of the project? You should also calculate another widely used criterion. What will be the IRR of the project? Analyzing Risk using Scenario Analysis

 

You consider the electricity cost as one of the major factors affecting your variable costs and

 

would like to perform some additional analysis to check the project?s sensitivity to electricity

 

costs. As was mentioned EIA has several electricity cost projections (Excel sheet, tab Energy

 

Prices Forecast). First you decide to see how your recommendations might change under

 

different cost scenarios. Perform scenario analysis on the electricity cost and present the summary of results. Break-even Analysis

 

Next, you would like to find the maximum electricity cost in year 1 at which the project would

 

still be advisable. For simplicity assume 0.5% annual growth of electricity costs. Find the break-even value for the electricity cost in year 1. Monte Carlo Simulation

 

Finally, you would like to perform a Monte Carlo simulation. Possible distribution assumptions

 

are provided in Excel Spreadsheet tab ?Crystal Ball Simulation,? but you are welcome to make

 

(and explicitly state) your own and used Random Numbers generator in Data Analysis Pack. Based on your analysis, what is the probability that the project will be profitable? [Crystal Ball] You also want to estimate the sensitivity of your project to different factors. Using Crystal Ball, please create a Tornado Diagram and discuss its results.

 


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