Assignment
Ze-Bikes, Ltd (ZB) is a company that has been selling e-bikes for the past 10 years. They are now considering a new generation of e-bikes, a "Ze-Bike". These Ze-bikes are more efficient and require less electricity; 1) they have extendable solar panels that can charge the bike even when riding, and 2) it uses a "hybrid" technology that charges the bike when going downhill.
Undertaking this new bike would require new machinery, and six small 3D printers to print parts. Ze-Bike wants to remain competitive and therefore expects that if the product sells well, they will want to produce an upgraded version of the bike in 6 years and cease producing the original model.
You have worked for ZB for a year now, and your manager has asked you to help analyse the potential new product. Your team has collected the following estimations and grouped them into two areas: (A) Revenue & Costs, and (B) Capital Expenditures (Machinery and 3-day printers).
A) Revenue & costs
a) ZB conducted market research (costing $40,000) showing that annual sales are expected to be around 9,000 Ze-Bikes in the first year and is expected to grow at 12% per year over the next six years. It has also invested $80,000 in R&D to come up with the design and technology for the Ze-Bike.
b) Each Ze-Bike will be sold for $4000 in the first year. The price will increase at the inflation rate over the next six years.
c) If the new Ze-Bike launched, ZB estimates that net revenue from their existing e-bikes will decrease by $5,000,000 per year (5,000 bikes *$1000 per bike).
d) Variable costs of production are $1000 per bike for the first year. The costs will increase at the inflation rate over the next six years.
e) Fixed costs of production are $1,000,000 per year.
f) Administrative costs for the company will increase by $180,000 per year because of the new product line. However, this new line of bike production will be charged with an annual share of the business's administrative costs, totalling $100,000 per year.
g) If ZB launches the new bike, they will increase their box order with CustomBoxCo, reducing their per-unit box cost on other product lines. This is estimated to save $30,000 per year.
h) The company will produce its product in a part of their current factory, which it currently rents out for $160,000 per year.
i) To finance this new production line, the company will borrow part of the capital required from the bank, with an interest cost of $24,000 per year.
B) Capital Expenditures
a) The bike solar panel assembly system will cost $12,400,000. At the end of 6 years, the solar panel is estimated to be sold for $3,000,000.
b) ATO regulations require depreciation over 20 years to zero using the straight-line method.
c) The hybrid technology machine will cost $5,000,000. At the end of 6 years, the machine is expected to be sold for $2,500,000.
d) ATO regulations require depreciation over 10 years to $100,000 using the straight-line method.
e) The total cost of the six required 3D printers is $3,350,000. At the end of 6 years, the estimated value of the 3D printers is $2,200,000 and will be sold.
f) ATO regulations require depreciation over 10 years to zero using the straight-line method.
Additional Information:
a) The project will require working capital of $15,000 which will be recovered at the end of the 6-year life of the project.
b) ZB faces a corporate tax rate of 30%.
c) ZB estimates the cost of capital for this project at 17%.
d) ZB's policy is to reject projects with a payback period of more than 4 years.
e) Inflation rate is expected to be 3%.
Task
A. Which cash flows are not-relevant? Why? Fill out the yellow items in the sheet "Inputs", and highlight the non-relevant items in red
B. Calculate the net-proceeds at the end of the project for the three capital expenditures. What are the netproceeds for the solar panel assembly system? The Hybrid technology machine? The 3D printers? Fill out the light blue items in the "inputs" sheet
C. Calculate after-tax free cash flow in the sheet "Cash Flows". What is the project's initial (year 0) investment outlay? What are the project's Years 1, 2, 3, 4 and 5 after-tax free cash flow? (they should be different, as we have growth rates for several inputs) What is the project's terminal (year 6) after-tax free cash flow?
D. What is the project's NPV? IRR? Payback period?
E. Should the company accept or reject the project? Why?