Reference no: EM13779654

GM Company is considering opening a dealership in Germany, but is unsure ifit can earn an 8% rate of return that is promised by an alternative investment (of similar risk).The initial outlay for a dealership office would be $400K, and another $220K would have tobe spent immediately on initial operating expenses such as mechanic shop materials, land,security deposits and advertising.Once the business is begun, annual cash operating expenses would drop to $200K each yearfor the first two years and $180K per year thereafter. The dealership would be operated for 4years (Tesla has other plans after that). Revenues from Electric Vehicles sales are expected tobe $300K in the first year of operation and to increase by $80K each subsequent year.The initial $400K investment in mechanic shop materials has an economic life of 4 years,and will be depreciated by the straight line method. Depreciation is deductible for taxpurposes, and the tax rate is 40%.

a) What is the Net Present Value (NPV) of Tesla's Potential investment in a dealershipin Germany?

 Would NPV increase, decrease, or remain the same under each of the followingassumptions? (each situation is independent of the others)

i) The initial depreciable investment is $600K instead of $400K

ii) Operating Expenses in the 3rd and 4th years are $160K instead of $180K

iii) The tax rate is 30% instead of 40%iv) The discount rate is 9% instead of 8%[5 points each, 20 points total]

B. Identify and describe and three rate base misconceptions? Think of the "rate base culture" atmany utilities. Additionally, think of it in terms of Capital expenditures and Operationalexpenditures.