Reference no: EM13481028

Otobai is considering still another production method for its electric scooter. It would require an investment of $15.30 billion in addition to the initial investment of $15.3 billion but would reduce variable costs by $46,000 per unit. The cost off capital was assumed to be 12%. 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 1.06 million

Market share 0.1

Unit price $405,000.0

Unit variable cost $330,000.0

Fixed cost $3.06 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 $15.30 billion.

Investment is depreciated over 10years straight-line and income is taxed at a rate of 50%.

Year 0 Years 1-10

1. Investment $15.30

2. Revenue 42.93

3. Variable Cost 33.00

4. Fixed Cost 3.06

5. Depreciation 1.53

6. Pretax Profit 5.34

7.Tax 2.67

8. Net Profit 2.67

9. Operating Cash Flow 3

10. Net Cash Flow -15 3

e.) Calculate the DOL. Consider fixed cost assuming the additional investment of $15.30 billion.