Electrobicycle Archives - assignment gods

Determine the NPV for the Electrobicycle project

Determine the NPV for the Electrobicycle project. Use the annual project cash flow from the table above. For the required rate of return, use the percent value from your birthday date. For example, if your birthday falls on the 16th of the month, the required rate of return would be 16%.

For guidance, review Section 7.1 of the textbook, NPV Example: The Pizza Scooter Delivery Project Revisited.

Calculate the NPV of the Electrobicycle project. Be sure to show your NPV calculations.

Explain, in your own words, why working capital investments are subtracted each year in the cash flows.

Explain, in your own words, the meaning of the required rate of return for the project.

Assume the auto company has a required rate of return of 15%. Based on the required rate of return you used for the Electrobicycles (based on your birthday date), is the Electrobicycle project more or less risky than the auto company? Explain your answer.

Based on your concluded NPV, should the company invest in this project to build Electrobicycles? Justify your answer.

Imagine that you own a company, Optimus, Inc., which is funded with 40% debt and 60% common stock; there is no preferred stock in the capital structure. The debt has an after-tax cost of 4%. You have studied the Electrobicycle project, and you believe that the auto company who has done the research and development (R&D) has made a crucial mistake. You believe that after the first 5 years, there will be worldwide expansion opportunities and many more years of revenues and earnings from selling Electrobicycles. Thus, you would not shut down the project in Year 5. Instead, you believe you will be able to sell the Electrobicycle business in Year 5 to a multinational company that will continue to produce the products and sell them internationally for many years into the future. You believe the sale of the Electrobicycle business in Year 5 will be for at least $15.0 million. Thus, you believe the value of the Electrobicycle project is significantly higher than the auto company realizes.

For the initial post,

Calculate Optimus’ required rate of return on equity using the capital asset pricing model (CAPM). For the CAPM, use the following assumptions:

Use a risk-free rate of 4.0%.

Use 6.0% as the market risk premium.

For the beta, use the beta below, according to the first letter of your first name

First Letter of First Name Beta

A through B 0.30

C through D 0.40

E through F 0.50

G through H 0.60

I through J 0.70

K through L 0.80

M through N 0.90

O through P 1.00

Q through R 1.10

S through T 1.20

U through V 1.30

W through Z 1.40

Calculate the WACC for Optimus. As a reminder, Optimus is funded with 40% debt and 60% common stock; there is no preferred stock in the capital structure. The debt has an after-tax cost of 4%.

Use the Optimus required rate of return on equity that you calculated using the CAPM.

Explain why it is appropriate for Optimus to value the Electrobicycle project using its WACC. Compare using the WACC to using solely the cost of equity in valuing the Electrobicycle project.