GOGreen has made the following projections:
The price for each unit in the first year will be AU$50,000. This price will increase each year by 5%.Variable costs are 60% of the sales price, which will grow by 3% each year.Fixed costs are $5 mil pa, which are expected to grow by 2% each year.The project is for a term of 5 years. The projected growth of the EV line is expected to outgrow the plant at this time, hence the plan will be sold at the end of 5 years.Initial investment into manufacturing equipment of $100 million;equipment may be depreciated at 20% straight-line (prime cost) method.In 5 years, the plant will be worth 10% of its’ purchase price.Working capital $3 million.GOGreen’s required rate of return is 4.5%. The tax rate for GOGreen is 30%.
(b) You are asked to present a report on your findings regarding the upgrade proposal. Make a recommendation to Management on whether they should proceed with the project or not. Explain the criteria on which you have based your decision. (10 marks)
(c) It has come to your attention that variable costs are anticipated to rise by 10% per annum due to the prospective growth within the industry. Would you recommend to proceed with the project? (Show all calculations). (5 marks)
(d) You have been asked to provide a further evaluation regarding the alternative use of the plant for the purpose of manufacturing electric buses, however the project life will be for 10 years. Explain how financial managers may evaluate both projects that are of unequal lives. (10 marks)
Mainly focus on the question number d You have been asked to provide a further evaluation regarding the alternative use of the plant for the purpose of manufacturing electric buses, however the project life will be for 10 years. Explain how financial managers may evaluate both projects that are of unequal lives. (10 marks)
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