Question

Otobai Company in Osaka, Japan is considering the introduction of an electrically powered motor scooter for city use. The scooter project requires an initial investment of ¥16.8 billion. The cost of capital is 9%. The initial investment can be depreciated on a straight-line basis over the 10-year life of the project. Profits are taxed at a rate of 50%. Consider the following project estimates:

Market size 1.28 million

Market share .1

Unit price ¥ 580,000

Unit variable cost ¥ 540,000

Fixed cost ¥ 2.18 billion

What is the NPV of the electric scooter project? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in billions rounded to 3 decimal places.)

Answer 1

Solution:
	NPV of the electric scooter project	- ¥1.975	billion
Working Notes:
	NPV
	= -initial investment + Operating cash flow x PVIFA ( 9% , 10)
	initial investment = ¥16.8 billion
	Calculation of Operating cash flow
	Revenue	74.240	A
	[Market size x Market share x Unit price]
	[1.28 million x 0.1 x 580,000]
	[.00128 billion x 0.1 x 580,000]
	Less: Variable cost	69.120	B
	[Market size x Market share x Unit variable cost]
	[1.28 million x 0.1 x 540,000]
	[.00128 billion x 0.1 x 540,000]
	Less: Fixed cost	2.180	C
	Less: Annual Depreciation	1.680	D
	(cost/life) =16.8/10 = 1.68
	Pre-tax profit	1.260	E=A-B-C-D
	Less: Taxes	0.63	F
	{ Pre-tax profit 1.26 x tax rate 50% = 0.63]
	Net operating Profit	0.630	G=E-F
	Add: Depreciation	1.68	H
	Operating cash flow	2.310	I = G+H
	NPV
	= -initial investment + Operating cash flow x PVIFA ( 9% , 10)
	= -16.800 + 2.310 x 6.417657701
	=-1.9752010711
	-1.975
PVIFA ( 9% , 10) @ 9 % for 1 to 10th is calculated = (1 - (1/(1 + 0.09)^10) ) /0.09 = 6.417657701
Please feel free to ask if anything about above solution in comment section of the question.