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Otobai is considering still another production method for its electric scooter. It would require an investment of $15.45 billion in addition to the initial investment of $15.45 billion but would reduce variable costs by $49,000 per unit. The cost off capital was assumed to be 13%. The total investment can be depreciated on a straight-line basis over the 10-year period, and profits are taxed at a rate of 50%.
Consider the following estimates for the scooter project
Market size 1.09 million
Market share 0.1
Unit price $420,000.0
Unit variable cost $345,000.0
Fixed cost $3.09 billion
Assume investment is depreciated over 10 years straight-line and income is taxed at a rate of 50%.
a.) What is the NPV of this alternative scheme?
b.) Calculate the break-even point.
c.) Consider the following Preliminary cash-flow forecasts for Otobai's electric scooter project (figures are in $billions). Calculate the variable cost per unit at which the electric scooter project would break even. Assume that the initial investment is $15.45 billion. Investment is depreciated over 10years straight-line and income is taxed at a rate of 50%.
Year 0 Years 1-10
1. Investment $15.4
2. Revenue 45.78
3. Variable Cost 34.50
4. Fixed Cost 3.09
5. Depreciation 1.54
6. Pretax Profit 6.64
7.Tax 3.32
8. Net Profit 3.32
9. Operating Cash Flow 3
10. Net Cash Flow -15 3
e.) Calculate the DOL. Consider fixed cost assuming the additional investment of $15.45 billion.
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