Because of increased consumer demand for fuel-efficient, alternative-energy automobiles, Global Auto Company is considering investing in a new hybrid crossover vehicle. Development costs each year for a 2-year period for this new vehicle are estimated as $750 million. Tooling and other setup costs in year 2 are estimated at $1 billion. Actual production and sales are estimated to begin in year 3. It is anticipated that the plant being envisioned could produce vehicles for 6 years. Each vehicle sold is estimated to provide $3,500 of net cash flow (pretax). The estimated salvage value of the manufacturing plant after 6 years of operation is thought to be $250 million. Assume that all cash flows take place at year- end and that the pretax WACC (discount rate) for Global Auto is 15%. Income tax effects can be ignored in this problem.
Because of increased consumer demand for fuel-efficient, alternative-energy automobiles, Global Auto Company is considering investing in a new hybrid crossover vehicle. Development costs each year for a 2-year period for this new vehicle are estimated as $750 million. Tooling and other setup costs in year 2 are estimated at $1 billion. Actual production and sales are estimated to begin in year 3. It is anticipated that the plant being envisioned could produce vehicles for 6 years. Each vehicle sold is estimated to provide $3,500 of net cash flow (pretax). The estimated salvage value of the manufacturing plant after 6 years of operation is thought to be $250 million. Assume that all cash flows take place at year- end and that the pretax WACC (discount rate) for Global Auto is 15%. Income tax effects can be ignored in this problem.
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 2TP: Austins cell phone manufacturer wants to upgrade their product mix to encompass an exciting new...
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Nikul
![Required information
[The following information applies to the questions displayed below.]
Because of increased consumer demand for fuel-efficient, alternative-energy automobiles, Global Auto Company is
considering investing in a new hybrid crossover vehicle. Development costs each year for a 2-year period for this new
vehicle are estimated as $750 million. Tooling and other setup costs in year 2 are estimated at $1 billion. Actual production
and sales are estimated to begin in year 3. It is anticipated that the plant being envisioned could produce vehicles for 6
years. Each vehicle sold is estimated to provide $3,500 of net cash flow (pretax). The estimated salvage value of the
manufacturing plant after 6 years of operation is thought to be $250 million. Assume that all cash flows take place at year-
end and that the pretax WACC (discount rate) for Global Auto is 15%. Income tax effects can be ignored in this problem.
Required:
1. What minimum volume of car sales (per year, in the 6-year life of the plant) is needed to make this proposed investment acceptable
using NPV as the decision criterion? (Note: For calculating present values of after-tax cash flows, use the following formula rather than
the PV factors presented in Table 1 in Appendix C: PV₁ = 1/(1+), where r= discount rate (WACC) and / (year) = 1-8. Also, use the Goal
Seek function in Excel to answer this question.) (Round your answer to the nearest whole number.)
2. How does your answer in requirement 1 change if the company's pretax WACC is 16 % ? 14 % ? Do you think the estimated NPV of this
project is sensitive to the estimate of the company's discount rate? (Round your answers to the nearest whole number.)
1. 15% WACC
2a. 16% WACC
2b. 14% WACC
2c. Is NPV sensitive to discount rate?
Minimum Volume of
Car Sales
No](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F44778d76-b1e6-4022-9488-e9d241934493%2Fd6b73e90-e78e-4bcd-9dab-9f1cd7e602de%2F1i44hm8_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Required information
[The following information applies to the questions displayed below.]
Because of increased consumer demand for fuel-efficient, alternative-energy automobiles, Global Auto Company is
considering investing in a new hybrid crossover vehicle. Development costs each year for a 2-year period for this new
vehicle are estimated as $750 million. Tooling and other setup costs in year 2 are estimated at $1 billion. Actual production
and sales are estimated to begin in year 3. It is anticipated that the plant being envisioned could produce vehicles for 6
years. Each vehicle sold is estimated to provide $3,500 of net cash flow (pretax). The estimated salvage value of the
manufacturing plant after 6 years of operation is thought to be $250 million. Assume that all cash flows take place at year-
end and that the pretax WACC (discount rate) for Global Auto is 15%. Income tax effects can be ignored in this problem.
Required:
1. What minimum volume of car sales (per year, in the 6-year life of the plant) is needed to make this proposed investment acceptable
using NPV as the decision criterion? (Note: For calculating present values of after-tax cash flows, use the following formula rather than
the PV factors presented in Table 1 in Appendix C: PV₁ = 1/(1+), where r= discount rate (WACC) and / (year) = 1-8. Also, use the Goal
Seek function in Excel to answer this question.) (Round your answer to the nearest whole number.)
2. How does your answer in requirement 1 change if the company's pretax WACC is 16 % ? 14 % ? Do you think the estimated NPV of this
project is sensitive to the estimate of the company's discount rate? (Round your answers to the nearest whole number.)
1. 15% WACC
2a. 16% WACC
2b. 14% WACC
2c. Is NPV sensitive to discount rate?
Minimum Volume of
Car Sales
No
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