GM Company is considering opening a dealership in Germany, but is unsure if it 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 to be 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 year for the first two years and $180K per year thereafter. The dealership would be operated for 4 years (GM has other plans after that). Revenues from Electric Vehicles sales are expected to be $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 tax purposes, and the tax rate is 40%.
Question:
Identify and describe and three rate base misconceptions? Think of the “rate base culture” at many utilities. Additionally, think of it in terms of Capital expenditures and Operational expenditures.