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Introduction: You have recently been hired as a Financial Analyst in the Finance Department of Zeta Auto Corporation which is seeking to expand production. The CFO asks you to help decide whether the...

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Introduction:
You have recently been hired as a Financial Analyst in the Finance Department of Zeta Auto Corporation which is seeking to expand production. The CFO asks you to help decide whether the firm should set up a new plant to manufacture the roadster model, the Zeta Spenza.
Deliverables:
Write a report providing the CFO with your recommendation whether Zeta should set up the plant to produce the Spenzas and support your recommendation by in-depth analysis in Excel. In your report, explain the results of each portion of your analysis (represented by the tabs on the Excel template). Submit all the completed Excel worksheets with the completed responses to the questions posed to support your report and recommendation. Report should include a one-page Executive Summary summarizing the results of your analysis and recommendation.
Project Data
To assess the suitability of the project you begin by listing the various cash flows. A consultant has been paid $150,000 to do a market survey. She reports back that Zeta can price Spenzas at $80,000 per car and sell 5,000 cars next year (in year 1), then sales will peak at 7,000 in year 2 and after that they will start declining with 6,000 Spenzas sold in year 3, 4,000 in year 4, and 3,000 in year 5. After that the sales decline will not make manufacturing of Spenzas profitable. The consultant also estimates that introduction of Spenza model will cannibalize the sale of an existing model, the Zeta Monza, resulting in 1,000 fewer units of the Monza sold in each of the 5 years. Monza’s are priced at $65,000.
After 5 years it is expected the Spenza will be phased out, and the plant will be put to other uses generating after-tax cash flow of $15 M annually.
The cost of setting up the plant is to be $250 M with annual manufacturing capacity of 10,000 cars. It is a one-time capital investment made at the very beginning of the project. In addition, at the beginning of each year the plant will require an outlay of Net Working Capital equal to 7.5% of direct manufacturing costs (excluding labor and overheads) in the coming year. The NWC outlay will be recovered at the end of the project in year 5.
The CFO provided you with historical information about Monza’s cost structure (Excel sheet attached) and noticed that Spenza will have the following differences:
· Spenza’s body will be made from reinforced ca
on, which makes the car lighter, thus significantly improving mileage range per battery charge. About 80% of the ca
on cost is the cost of energy and the estimated ca
on cost body per car of $14,000 is based on electricity cost of 7 cents /per kWh, which is the cu
ent cost of electricity in Michigan, where the plant will be located. This cost is 70% of the average nationwide retail electricity price. EIA nationwide electricity cost projections for future years are provided in the Excel sheet.
· Battery Pack cost for Spenza is $15,000 per car.
· Cost of materials for engine and other parts will be identical to Monza’s.
· Labor cost of $5,000 per car is based on annual production of 10,000 Spenza’s. Labor is unionized; number of workers and wages do not depend on the number of units produced.
· Overheads at the new plant will be identical to total overheads at the existing Monza plant.
IRS allows you to straight line depreciate the cost of the plant over 4 years for tax purposes (equal depreciation in all years and not an accelerated schedule of depreciation). You have a choice to use 3 year MACRS depreciation schedule (see the Excel sheet attached)
If you recommend setting up the plant, you should also consider that the plant will occupy a piece of land which the firm could put to other uses. These alternative uses would earn the firm $15 M after-tax annually.
Modeling Financial Metrics and Cash Flows
Depreciation
You have to decide whether Zeta should set up the plant to produce the Spenza’s by answering the following series of questions. After having enumerated the various cash flows you are now ready to analyze the project using capital budgeting techniques and project analysis methods.
· What will be the depreciation for tax purposes from the investment in the Spenza plant using the straight line method? What will be the depreciation using MACRS? Which schedule would you recommend to use?
EBIT
· What will be the costs and revenues for the first four years? What will be the incremental EBIT (Earnings before Interest and Taxes) each year?
Interest and Taxes
You now have to need to determine interest costs and taxes. Assume that the cost of setting up the plant will be 50% financed by debt with an interest rate of 6%.
At this point you are getting closer to the cash flows the project will produce, and need to determine the tax rate. You research tax rates and determine that the appropriate tax rate after the tax reform is 21%.
· What incremental taxes Zeta will pay if the Spenza plant is set up?
Net Income
· What will be the Net Income for Zeta from the project each year?
Incremental OCF
Now you can calculate the net increase in cash flows from the project.
· What will be the incremental OCF (Operating Cash Flow) each year?
Free Cash Flow
The next step will be calculating FCF taking into account OCF and other incremental cash flows, including opportunity costs!
· What will be the FCF (Free Cash Flow) each year?
WACC and CAPM
The next step will be estimating WACC. Using Yahoo Finance! or other financial sources available on the course website find auto-making industry’s beta, market risk premium and the risk free rate.
· Estimate the WACC using the earlier assumption about the project’s financing and the CAPM equation for the cost of equity.
Decision Criteria – NPV and IRR
Now you are ready to calculate the first criterion that is used to assess projects.
· What will be the Net Present Value of the project?
You should also calculate another widely used criterion.
· What will be the IRR of the project?
Analyzing Risk using Scenario Analysis
You consider the electricity cost and projected sales volume as two major factors affecting your variable costs and revenues. Therefore, you would like to perform some additional analysis to check the project’s sensitivity to electricity costs and to sales volumes. You want to analyze these two factors separately, one at a time.
As was mentioned EIA has several electricity cost projections (Excel sheet, tab Energy Prices Forecast). First you decide to see how your recommendations might change under different cost scenarios.
· Perform scenario analysis on the electricity cost and present the summary of results.
Given uncertainty of sales volume forecast, you would like to look at optimistic and pessimistic scenarios for sales. Optimistic scenario assumes sales volume to be 500 cars more than predicted (i.e., 5,500 cars in year 1, 7,500 in year 2 etc.). Pessimistic scenario assumes sales volume to be 500 cars less than predicted (i.e., 4,500 cars in year 1, 6,500 in year 2 etc.).
· Run scenario analysis on the sales volume and present the summary of results.
Break-even Analysis
Next, you would like to find the maximum electricity cost in year 1 at which the project would still be advisable. For simplicity assume 0.5% annual growth of electricity costs.
· Find the
eak-even value for the electricity cost in year 1.
Monte Carlo Simulation
Finally, you would like to perform a Monte Carlo simulation. Possible distribution assumptions are provided in Excel Spreadsheet tab “Crystal Ball Simulation,” but you are welcome to make (and explicitly state) your own and use Random Numbers generator in Data Analysis Pack.
· Based on your analysis, what is the probability that the project will be profitable?
[Crystal Ball] You also want to estimate the sensitivity of your project to different factors.
· Using Crystal Ball, please create a Tornado Diagram and discuss its results.

Basic Analysis
    Zeta Spenza Project
    Given
    Monza's sales    10,000            MACRS Schedule            Solution Legend
    Monza's price    $65,000            year 1    33%        Value given in problem
    Monza Cost structure per car                year 2    45%        Formula/Calculation/Analysis required
    Body materials    $11,000            year 3    15%        Assumptions, Qualitative analysis or Short answer required
    Engine    $4,000            year 4    7%        Goal Seek, Scenario or Data Table cell
    Drivetrain    $6,000                        Crystal Ball Input
    Battery Pack    $20,000                        Crystal Ball Output
    Electronics    $5,000
    Labor (allocated)
Dima Leshchinskii: Dima Leshchinskii:
ased on 10,000 Monzas sold annually    $5,000
    Overhead (allocated)
Dima Leshchinskii: Dima Leshchinskii:
ased on 10,000 Monzas sold annually    $2,000
    Consulting Fees    $150,000
    Spenza Price    $80,000
    Spenza Sales projections (number of cars)
            Year 1    Year 2    Year 3    Year 4    Year 5
    Base Case Scenario        5,000    7,000    6,000    4,000    3,000
    Optimistic Scenario        5,500    7,500    6,500    4,500    3,500
    Pessimistic Scenario        4,500    6,500    5,500    3,500    2,500
    Plant Investment     XXXXXXXXXX
    Alternative Land Use     XXXXXXXXXX
    Plant Capacity    10,000 cars
    Depreciation period    4 years
    Percentage of Debt Financing    50%
    Interest Rate    6%
    Tax rate    21%
    NWC as % of direct manufacturing costs    7.50%
    Monza Sales Cannibalization    1,000 cars
    Historical Electricity Cost    $0.07 per kWh    70% of national average
    Ca
on Body Cost per Car    $14,000
    Percentage of electricity    80%
    Electricity used per ca
    Other Spenza direct costs
    Body materials
(other than electricity)
    Engine    $4,000
    Drivetrain    $6,000
    Battery Pack    $15,000
    Electronics    $5,000
    Solution
    Choosing Depreciation
            Year 1    Year 2    Year 3    Year 4
    Straight-Line depreciation
    MACRS Depreciation
    Your recommendation
    Projected Net Income
            Year 2023    Year 2024    Year 2025    Year 2026    Year 2027
    Sales Volume (number of cars)        5,000    7,000    6,000    4,000    3,000
    Projected electricity cost (per kWh)
Dima Leshchinskii: Dima Leshchinskii:
See "Energy Prices Forecast" tab and adjust for local
    Revenues
    Direct Costs
    Body materials
(electricity only)
    Body materials
(other than electricity)
    Engine
    Drivetrain
    Battery Pack
    Electronics
    Total Direct Costs
    Fixed Costs
    Labo
    Overheads
    Depreciation
    EBIT
    Interest
    EBT
    Taxes
    Net Income
    Projected FCF
    Monzas Lost Profit
    Volume    1,000 cars
    Price    $65,000
    Direct Costs (per car)
    Lost Profit (After-Tax)
                        
        Year 0    Year 1    Year 2    Year 3    Year 4    Year 5
    OCF
    CapEx
    Investment in NWC
    Opportunity Costs
    Alternative Land Use
    Lost Profit from Cannibalized Sales
    FCF
    WACC (From WACC Tab)    8.00%
Dima Leshchinskii: Dima Leshchinskii:
Use value of WACC from
WACC Ta
Before you find it, temporary use 8% as a plug
    
Dima Leshchinskii: Dima Leshchinskii:
ased on 10,000 Monzas sold annually    
Dima Leshchinskii: Dima Leshchinskii:
ased on 10,000 Monzas sold annually    
Dima Leshchinskii: Dima Leshchinskii:
See "Energy Prices Forecast" tab and adjust for local    NPV
    IRR
    Electricity Costs Scenarios
            Year 2023    Year 2024    Year 2025    Year 2026    Year 2027
    Reference case
    High economic growth
    Low economic growth
    High oil price
    Low oil price
    High oil and gas supply
    Low oil and gas supply
    High renewable cost
    Low renewable cost
WACC
                                Value given in problem
                                Formula/Calculation/Analysis required
                                Qualitative analysis or Short answer required
    Your assumptions
    Comparable Companies Unlevered Beta
    Company
Author: Author:
Please replace stabs below by real peers names. The number of peers does not have to be five    Levered Beta    Market Value of Debt    Market Value of Equity    Debt/ Equity    Equity/ Total Assets    Marginal Tax Rate    Unlevered Beta
    Peer Company A
    Peer Company B
    Peer Company C
    Peer Company D
    Peer Company E
    Median
    Mean
    Relevered Beta    Mean Unlevered Beta    Target Debt/ Equity    Target Marginal Tax Rate    Relevered Beta
    Zeta
    WACC Calculation
    Company's Capital Structure
    Debt to Total Capitalization
    Equity to Total Capitalization
    Debt to Equity Ratio
    Cost of
Answered 22 days AfterMar 14, 2022

Solution

Rochak answered on Apr 05 2022
64 Votes
Basic Analysis
    Zeta Spenza Project
    Given
    Monza's sales    10,000            MACRS Schedule            Solution Legend
    Monza's price    $65,000            year 1    33%        Value given in problem
    Monza Cost structure per car                year 2    45%        Formula/Calculation/Analysis required
    Body materials    $11,000            year 3    15%        Assumptions, Qualitative analysis or Short answer required
    Engine    $4,000            year 4    7%        Goal Seek, Scenario or Data Table cell
    Drivetrain    $6,000                        Crystal Ball Input
    Battery Pack    $20,000                        Crystal Ball Output
    Electronics    $5,000
    Labor (allocated)
Dima Leshchinskii: Dima Leshchinskii:
ased on 10,000 Monzas sold annually    $5,000
    Overhead (allocated)
Dima Leshchinskii: Dima Leshchinskii:
ased on 10,000 Monzas sold annually    $2,000
    Consulting Fees    $150,000
    Spenza Price    $80,000
    Spenza Sales projections (number of cars)
            Year 1    Year 2    Year 3    Year 4    Year 5
    Base Case Scenario        5,000    7,000    6,000    4,000    3,000
    Optimistic Scenario        5,500    7,500    6,500    4,500    3,500
    Pessimistic Scenario        4,500    6,500    5,500    3,500    2,500
    Plant Investment    250000000
    Alternative Land Use    15000000
    Plant Capacity    10,000 cars
    Depreciation period    4 years
    Percentage of Debt Financing    50%
    Interest Rate    6%
    Tax rate    21%
    NWC as % of direct manufacturing costs    7.50%
    Monza Sales Cannibalization    1,000 cars
    Historical Electricity Cost    $0.07 per kWh    70% of national average
    Ca
on Body Cost per Car    $14,000
    Percentage of electricity    80%
    Electricity used per car    160,000 kWh
    Other Spenza direct costs
    Body materials
(other than electricity)    $2,800
    Engine    $4,000
    Drivetrain    $6,000
    Battery Pack    $15,000
    Electronics    $5,000
    Solution
    Choosing Depreciation
            Year 1    Year 2    Year 3    Year 4
    Straight-Line depreciation        62500000    62500000    62500000    62500000
    MACRS Depreciation        82500000    112500000    37500000    17500000
    Your recommendation    MACRS Depreciation
    Projected Net Income
            Year 2023    Year 2024    Year 2025    Year 2026    Year 2027
    Sales Volume (number of cars)        5,000    7,000    6,000    4,000    3,000
    Projected electricity cost (per kWh)
Dima Leshchinskii: Dima Leshchinskii:
See "Energy Prices Forecast" tab and adjust for local        $0.07    $0.07    $0.07    $0.07    $0.07
    Revenues        400000000    560000000    480000000    320000000    240000000
    Direct Costs
    Body materials
(electricity only)        59670828    82831066.08    70931562.24    47305059.2    35514662.4
    Body materials
(other than electricity)        14000000    19600000    16800000    11200000    8400000
    Engine        20000000    28000000    24000000    16000000    12000000
    Drivetrain        30000000    42000000    36000000    24000000    18000000
    Battery Pack        75000000    105000000    90000000    60000000    45000000
    Electronics        25000000    35000000    30000000    20000000    15000000
    Total Direct Costs        223670828    312431066.1    267731562.2    178505059.2    133914662.4
    Fixed Costs
    Labor        25000000    35000000    30000000    20000000    15000000
    Overheads        10000000    14000000    12000000    8000000    6000000
    Depreciation        82500000    112500000    37500000    17500000    0
    EBIT        58829172    86068933.92    132768437.8    95994940.8    85085337.6
    Interest        7500000    7500000    7500000    7500000    7500000
    EBT        51329172    78568933.92    125268437.8    88494940.8    77585337.6
    Taxes        10779126.12    16499476.12    26306371.93    18583937.57    16292920.9
    Net Income        40550045.88    62069457.8    98962065.83    69911003.23    61292416.7
    Projected FCF
    Monzas Lost Profit
    Volume    1,000 cars
    Price    $65,000
    Direct Costs (per car)    $44,734
    Lost Profit (After-Tax)    20265834.4
                        
        Year 0    Year 1    Year 2    Year 3    Year 4    Year 5
    OCF    0    123050045.9    174569457.8    136462065.8    87411003.23    61292416.7
    CapEx    -250000000
    Investment in NWC    -16775312.1    -23432329.96    -20079867.17    -13387879.44    -10043599.68    0
    Opportunity Costs
    Alternative Land Use    -15000000    -15000000    -15000000    -15000000    -15000000    -15000000
    Lost Profit from Cannibalized Sales        -20265834.4    0    0    0    0
    FCF    -281775312.1    64351881.52    139489590.6    108074186.4    62367403.55    46292416.7
    WACC (From WACC Tab)    10.65%
Dima Leshchinskii: Dima Leshchinskii:
Use value of WACC from
WACC Ta
Before you find it, temporary use 8% as a plug
    
Dima Leshchinskii: Dima Leshchinskii:
ased on 10,000 Monzas sold annually    
Dima Leshchinskii: Dima Leshchinskii:
ased on 10,000 Monzas sold annually    
Dima Leshchinskii: Dima Leshchinskii:
See "Energy Prices Forecast" tab and adjust for local    NPV    39596135.57
    IRR    16.50%
    Electricity Costs Scenarios
            Year 2023    Year 2024    Year 2025    Year 2026    Year 2027
    Reference case        $0.0746    $0.0740    $0.0739    $0.0739    $0.0740
    High economic growth        $0.0755    $0.0749    $0.0749    $0.0750    $0.0750
    Low economic growth        $0.0739    $0.0732    $0.0730    $0.0732    $0.0732
    High oil price        $0.0749    $0.0741    $0.0736    $0.0733    $0.0728
    Low oil price        $0.0751    $0.0751    $0.0750    $0.0747    $0.0745
    High oil and gas supply        $0.0735    $0.0725    $0.0719    $0.0714    $0.0712
    Low oil and gas supply        $0.0767    $0.0761    $0.0762    $0.0772    $0.0776
    High renewable cost        $0.0746    $0.0740    $0.0740    $0.0745    $0.0745
    Low renewable cost        $0.0745    $0.0736    $0.0734    $0.0733    $0.0732
WACC
                                Value given in problem
                                Formula/Calculation/Analysis required
                                Qualitative analysis or Short answer required
    Your assumptions
    The assumption made is that the market risk premium will be the average annualized return of the S&P 500 over the last 10 years. The Risk-Free rate is assumed to be the 10-year U.S. Treasury Yield. The three peer companies which are chosen for the calculation of the beta are Tesla Inc., General Motors Company and Ford Motor Company
    Comparable Companies Unlevered Beta
    Company
Author: Author:
Please replace stabs below by real peers names. The number of peers does not have to be five    Levered Beta    Market Value of Debt    Market Value of Equity    Debt/ Equity    Equity/ Total Assets    Marginal Tax Rate    Unlevered Beta
    Tesla, Inc.    2.08    8,900,000,000    1,140,000,000,000    0.01    0.99    0.21    2.07
    General Motors Company    1.20    110,590,000,000    62,741,000,000    1.76    0.36    0.21    0.50
    Ford Motor Company    1.10    139,490,000,000    66,954,000,000    2.08    0.32    0.21    0.42
    Peer Company D
    Peer Company E
    Median                            0.50
    Mean                            0.99
    Relevered Beta    Mean Unlevered Beta    Target Debt/ Equity    Target Marginal Tax Rate    Relevered Beta
    Zeta    0.995    0.5    0.21    1.3878
    WACC Calculation
    Company's Capital Structure
    Debt to Total Capitalization    50.00%
    Equity to Total Capitalization    50.00%
    Debt to Equity Ratio    100.00%
    Cost of Equity
    Risk-free rate    2.42%    10-Year U.S. Treasury Yield
    Market risk Premium    12.61%    10-Year S&P 500 Return
    Levered Beta    1.39
     Cost of Equity    16.561906%
    Cost of Debt
    Cost of Debt    6.00%
    Taxes    21.00%
     After Tax Cost of Debt    4.74%
    WACC    10.65%
The next step will be estimating WACC. Using Yahoo Finance! or other financial sources available on the course website find auto-making industry’s beta, market risk premium and the risk free rate
Electricity Scenario Summary
        Scenario Summary
            Reference case    High economic growth    Low economic growth    High oil price    Low oil price    High oil and gas supply    Low oil and gas supply    High renewable cost    Low renewable cost
        Year 1    $0.0746    $0.0755    $0.0739    $0.0749    $0.0751    $0.0735    $0.0767    $0.0746    $0.0745
        Year 2    $0.0740    $0.0749    $0.0732    $0.0741    $0.0751    $0.0725    $0.0761    $0.0740    $0.0736
        Year 3    $0.0739    $0.0749    $0.0730    $0.0736    $0.0750    $0.0719    $0.0762    $0.0740    $0.0734
        Year 4    $0.0739    $0.0750    $0.0732    $0.0733    $0.0747    $0.0714    $0.0772    $0.0745    $0.0733
        Year 5    $0.0740    $0.0750    $0.0732    $0.0728    $0.0745    $0.0712    $0.0776    $0.0745    $0.0732
        Result Cells:
        Project_NPV    39596135.57    37112282.88    41549314.77    40036645.15    37323457.69    44159530.95    33289147.39    39138321.69    40653231.42
        Project_IRR    16.50%    16.14%    16.78%    16.56%    16.17%    17.15%    15.60%    16.44%    16.65%
Sales Volume Scenario Summary
        Sales Volume Scenario Summary
            Reference Case Sales Volume    High Sales Volume    Low Sales Volume
        Changing Cells:
        Year 1    5,000    5,500    4,500
        Year 2    7,000    7,500    6,500
        Year 3    6,000    6,500    5,500
        Year 4    4,000    4,500    3,500
        Year 5    3,000    3,500    2,500
        Result Cells:
        Project_NPV    39596135.57    74433629.59    4758641.546
        Project_IRR    16.50%    21.25%    11.39%
        Notes: Cu
ent Values column represents values of changing cells at
        time Scenario Summary Report was created. Changing cells for each
        scenario are highlighted in gray.
Electricity Breakeven
    Electricity
eakeven
    Annual Growth    0.50%
    Year 1 electricity cost for Breakeven    0.1558840811                            Solution Legend
                                    Value given in problem
        Year 0    Year 1    Year 2    Year 3    Year 4    Year 5        Formula/Calculation/Analysis required
    Electricity Price        $0.1559    $0.1567    $0.1574    $0.1582    $0.1590        Assumptions, Qualitative analysis or Short answer required
                                    Goal Seek, Scenario or Data Table cell
    EBIT        58829172    86068933.92    132768437.8    95994940.8    85085337.6        Crystal Ball Input
    Interest        7500000    7500000    7500000    7500000    7500000        Crystal Ball Output
    EBT        51329172    78568933.92    125268437.8    88494940.8    77585337.6
    Taxes        10779126.12    16499476.12    26306371.93    18583937.57    16292920.9
    Net Income        40550045.88    62069457.8    98962065.83    69911003.23    61292416.7
    OCF        123050045.9    174569457.8    136462065.8    87411003.23    61292416.7
    CapEx    -250000000
    Investment in NWC    -16775312.1    -23432329.96    -20079867.17    -13387879.44    -10043599.68    0
    Opportunity Costs
    Alternative Land Use    -15000000    -15000000    -15000000    -15000000    -15000000    -15000000
    Lost Profit from Cannibalized Sales        -20265834.4    0    0    0    0
    FCF    -281775312.1    64351881.52    139489590.6    108074186.4    62367403.55    46292416.7
    WACC (From WACC Tab)    10.65%
Dima Leshchinskii: Dima Leshchinskii:
Use value of WACC from
WACC Ta
Before you find it, temporary use 8% as a plug
    NPV    0
    IRR    10.65%
CB_DATA_
    Crystal Ball Data
    Workbook Variables    Last Var Column    0
     Name:
     Value:
    Worksheet Data    Last Data Column Used
        2
    Sheet Ref
    ERROR:#REF!    ERROR:#REF!
    Sheet Guid
    37fccb5b-a68f-4c8d-b565-e2f487d69226    ca8ba31b-c2c8-4510-8cf7-b6d0b91c21c1
    Deleted sheet count
    Last row used
    31    31
    Data...
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