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Importance to the energy cost situation The new CEO has arranged the meeting with the top

managers of the firm and considered introducing a large public transit bus into the present product line. As the oil prices keep on going high and there is no chance that they will decrease, people would be more likely to use the public transport. The company should adapt to the changes of the market. It is now the fashion to be Go green. People show environmental consciousness to the whole world. The transition for the company would be easier if the scenario remains like this. Cash flow of the project for next 20 years The production and the sales begin in the third year. For year 0-2 there is a cash outflow of 1.1 billion in training, plant and equipment. In the beginning of the year 4 till 22, the annual inflation factor of 3.5% would be added to the bus price as well as to the expenses. Straight line depreciation would be used in years 3-22. The projected cash flows of the project can be calculated using the following spread sheet:

Price Units Revenue Labor cost per bus Parts cost per bus Engine cost per bus Bus warranty Engine warranty SG&A costs Depreciation EBIT Taxes NOPAT Depreciation (Add back) Operating cash flow Investment costs land Plant and equipment Working capital (year2 subtract, year 22 add back) Salvage summary land building clean up cost equipment salvage cost total salvage value net salvage value TOTAL CASH FLOWS NPV using company's WACC IRR

Unit data Year 0 220000 11000 2420000000 50000 95000 20000 1000 1000 250000000 1000000 2168833000 867533200 1301299800 1302299800 1302299800 4000000 6000000

Year 1

Year 2

Year 3

Years-4-22

5000000

2000000

1000000

-242000000

242000000 6210000 300000 15000000 21510000 21510000 21510000

1302299800

Cost of capital The cost of capital of the company can be calculated using the cost of debt and cost of equity of the company in the following manner:
Cost of Equity Riskfree rate Beta Market return Cost of Equity Cost of Debt Rate Taxrate Cost of Debt 6.25% 40% 3.75% 4.00% 1.15 6% 5.73%

WACC

4.94%

Choice of engines The choice of the engines would be based on the following calculations
Detriot Marcus WACC 4.94% 4.94% Warranty cost $1,000 $1,500.00 PV $1,752.32 $2,628.48 Engine cost 20000 18000 Total $21,752.32 $20,628.48 Sum PV factor for 5 years @4.94% 0.669344 0.448021 0.29988 0.200723 0.134353 1.752322

The engine which shows the lowest cost would be used in the making of the buses that is in this case the Marcus engine.

Capital budgeting technique- NPV and IRR The NPV and IRR calculation of the project can be done as below:
Interest rate Year Cash flow PV factor PV of cash flow Net Present Value 4.94% Marcus 0 1 2 3 4 year-22 year

-1302299800.00
1.00 (1,302,299,800) 1,897,513,000 IRR

1302299800.00
0.67 871,686,613

1302299800.00
0.45 583,458,242 23.221%

1302299800.00
0.29988 390,534,298

21510000.00
0.2007232 4,317,556

Detroit
Year Cash flow PV factor PV of cash flow Net Present Value 0 1 2 3 4 year-22 year

-$1,302,300,300.00 $1,302,299,800.00 $1,302,299,800.00 $1,302,299,800.00 $21,510,000.00


1.00 (1,302,300,300) 1,863,448,000 IRR 0.67 871,686,613 0.45 583,458,242 23.221% 0.29988 390,534,298 0.2007232 4,317,556

Thus from the calculations it can be interpreted that the NPV of the Marcus engine is more thus this should be preferred. Accept or reject If the financing of the project is done through debt financing then the cost of capital would be 3.75% and if financed through equity then it would be 10.33% as given in the fact.

In this scenario the investment needed is $1200 million, out of which the $200 million is to be obtained from $200 million and rest from either debt or equity in 40: 60 ratio. Thus the WACC would be 4.94%, which would be compared with the IRR of the project and thus it can be seen that the project can be accepted.