Question

Find PPE + Installation in Year 0 of CASH FLOWS

Find Opportunity Costs/Benefits in YEAR 0

Find Opportunity Costs/Benefits in YEAR 5

Find Salvage Value in Year 5

Find Tax Impact of Salvage in Year 5

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Tesla is considering expanding their production facilities to meet the growing demand for Tesla cars. You are given the following information:

The expansion would be a 5-year project. The expansion would take place on a plot of land that Elon Musk (the founder of Tesla) already owns. If the expansion doesn’t take place, the land could be sold today for $7,000,000.

Tesla commissioned a study on the feasibility of expansion three months ago, and paid $2,500,000 to consultants for the report.

To build the factory on the land would require a $80,000,000 up front investment in plant and property and an additional $15,000,000 in installation costs for the machinery.

Running the factory and machines will result in $7,000,000 of fixed costs per year.

Net Working Capital would have to increase by $1240000 at the beginning of the project (this money could be released at the end of the 5-year project).

Tesla would depreciate the factory and machinery using a 5-year MACRS schedule.

The factory and machinery can be sold off at the end of the 5-year project for $21,000,000.

-----> Elon Musk’s land can be sold off at the end of the 5-year project for $3500000.

Assume that the corporate tax rate is 21%. The new retail price for Tesla’s cars in yar 1 will equal $35,000, the existing retail price for the cheapest model (google "Tesla retail price") This price will increase by 5% per year during each year of the project.

Due to the expansion, Tesla will sell 12,000 (incremental) cars in Year 1, 15,000 in Year 2, and 18,000 in each of Years 3-5 of the project.

Answer 1

Year	0	1	2	3	4	5
	$ Amount
Land (opportunity cost)	7000000
Building	80000000
Installation	15000000
PPE+ Installation (year 0)	102000000
Net Working capital	1240000
Total outfow	103240000
		$ 000	$ 000	$ 000	$ 000	$ 000
Sale quantity		12000	15000	18000	18000	18000
Sale price		35000	36750	38587.5	40516.875	42542.72
Sale		420000	551250	694575	729303.75	765768.9
Fixed cost		7000	7000	7000	7000	7000
Depreciation		19000	30400	18240	10944	10944
Profit		394000	513850	669335	711359.75	747824.9
Tax (21%)		82740	107908.5	140560.4	149385.55	157043.2
Net profit		311260	405941.5	528774.7	561974.2	590781.7
Depreciation		19000	30400	18240	10944	10944
Post tax terminal value						20504.12
Recovery of woking capital						1240
Opportunity cost /benefit		330260	436341.5	547014.7	572918.2	623469.8
Salvage value and tax impact of salvage value
Post tax terminal value
	Land	Building	Total
Sale value	3500000	21000000
Book Value	0	5472000
Gain	3500000	15528000
Tax	735000	3260880
Net proceeds	2765000	17739120	20504120