Reference no: EM133006938

Tesla is planning to open its first manufacturing plant (for the production of batteries) outside the US. You are one of the financial analyst that will help assessing the feasibility of the investment.

• Tesla has commissioned one of the Big Four Consulting firm to provide some recommendations with regard to the current legal regulations in China. The consulting service fees will amount to $100,000 dollars.
• Suppose that the life of the project is 5 years and the initial investment in the project today is 300 million dollars.
• The plant will be depreciated to $0 book value over the 5 years and can be sold by Tesla in year 5 for 50 million dollars.
• It has been estimated that the new manufacturing plant will be able to generate 105 million dollars in annual revenue (starting at the end of the first year).
• The new production of batteries in China will have a direct impact on the production of batteries in the US. The revenues generated in US are estimated to drop by 5 million dollars each year.
• The annual variable costs are expected to be 15% of the "incremental annual revenues".
• The current weighted average cost of capital for Tesla is 11% and the company tax rate is 30%.
• Elon Musk (Tesla CEO) wants to recover the initial investment, before the next election in China, in three years' time.

Problem 1: Calculate the net present value (NPV) of this project. Should the project be undertaken? Explain why or why not.