FastCars is debating whether its next car model should be a gas or electric car. Due to factory limitations, FastCars will only be able to introduce one new model in the next five years • Both models would have a five-year lifecycle, before they would need to be completely redesigned. Thus FastCars will evaluate the project with a five-year time horizon • The gas model would have the following projected sales and cost of goods sold (in millions): Year 1 2 3 4 5 Sales 14 17 19 19 15 COGS 10 10 12 10 5 • The electric model would have the following projected sales and cost of goods sold (in millions): Year 1 2 3 4 5 Sales 5 10 25 30 30 COGS 4 7 15 15 12 • Initial capital expenditures for retooling the factory will be 10 million dollars for the gas model and 20 million dollars for the electric model. This cost will be depreciated fully using the straightline depreciation method over five years • A feasibility study was conducted that cost 1 million dollars and has already been paid for • The company’s tax rate is 25%, and the company can write off any tax losses against profits in other divisions • The appropriate discount rate for both projects is 15% What are the cash flows in each year if FastCars invests in the gas model
FastCars is debating whether its next car model should be a gas or electric car. Due to factory
limitations, FastCars will only be able to introduce one new model in the next five years
• Both models would have a five-year lifecycle, before they would need to be completely
redesigned. Thus FastCars will evaluate the project with a five-year time horizon
• The gas model would have the following projected sales and cost of goods sold (in millions):
Year 1 2 3 4 5
Sales 14 17 19 19 15
COGS 10 10 12 10 5
• The electric model would have the following projected sales and cost of goods sold (in millions):
Year 1 2 3 4 5
Sales 5 10 25 30 30
COGS 4 7 15 15 12
• Initial capital expenditures for retooling the factory will be 10 million dollars for the gas model
and 20 million dollars for the electric model. This cost will be depreciated fully using the straightline depreciation method over five years
• A feasibility study was conducted that cost 1 million dollars and has already been paid for
• The company’s tax rate is 25%, and the company can write off any tax losses against
profits in other divisions
• The appropriate discount rate for both projects is 15%
What are the cash flows in each year if FastCars invests in the gas model
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