Determine if tesla should undertake investment opportunity

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Tesla is deciding whether to invest in a new automobile assembly plant designed to produce autonomous vehicles, called T-quest. It will cost $400 million to build. If T-quest is successful, the plant will result in a constant stream of revenues for the next 20 years year of $600 million per annum. If the unsuccessful, the stream of revenues will be $300 million per annum. Tesla's financial assessment predict a 40% chance of success, and 60% chance of failure. The costs of goods are 80% of revenues and will be constant through the years. Level of working capital is 5% of the next year's sales revenues. The risk-adjusted cost of capital for this project is 20%, the opportunity cost of capital for the company is only 9%. The marginal tax rate is 40% for the company. The project has a 20-year term. Tesla uses straight-line depreciation method with a zero-salvage value.

Problem 1: Determine if Tesla should undertake this investment opportunity. Take your pick of the best investment criterion to use and solve the problem using only that criterion.

Reference no: EM133003770

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