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Description Need a excel worksheet with formulas and a eight paragraph summary on excel spreadsheet calculations. 2 attachmentsSlide 1 of 2attachment_1attachment_1attachment_2attachment_2.slider-slide > img { width: 100%; display: block; } .slider-slide > img:focus { margin: auto; } Unformatted Attachment Preview 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 $50,000 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 won't 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 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 4.75% 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 carbon, which makes the car lighter, thus significantly improving mileage range per battery charge. About 80% of the carbon cost is the cost of energy and the estimated carbon cost body per car of $14,000 is based on electricity cost of 7 cents /per kWh, which is the current 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 $4,000 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 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. • EBIT • 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? 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 7%. 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 break-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 Zeta Spenza Project Given Monza's sales Monza's price 10,000 $65,000 Monza Cost structure per car Body materials $11,000 Engine $4,000 Drivetrain $6,000 Battery Pack $20,000 Electronics $5,000 Labor (allocated) $4,000 Overhead (allocated) $2,000 Consulting Fees Spenza Price Base Case Scenario Optimistic Scenario Pessimistic Scenario $50,000 $80,000 Spenza Sales projections (number of cars) Year 1 Year 2 5,000 7,000 5,500 7,500 4,500 6,500 Plant Investment Alternative Land Use Plant Capacity Depreciation period Percentage of Debt Financing Interest Rate Tax rate NWC as % of direct manufacturing costs Monza Sales Cannibalization Historical Electricity Cost Carbon Body Cost per Car Percentage of electricity Electricity used per car Other Spenza direct costs MACRS Schedule year 1 year 2 year 3 year 4 Year 3 6,000 6,500 5,500 $250 Mil $15 Mil 10,000 cars 4 years 50% 7% 21% 4.75% 1,000 cars $0.07 per kWh 70% of national average if in table you have $14,000 In Michian 80% 160,000 kWh Body materials (other than electricity) Engine Drivetrain Battery Pack Electronics Straight-Line depreciation MACRS Depreciation Recommendation Sales Volume (number of cars) Projected electricity cost (per kWh) Revenues Direct Costs Body materials(electricity only) Body materials (other than electricity) Engine Drivetrain Battery Pack Electronics Total Direct Costs Fixed Costs Labor Overheads Depreciation EBIT Interest EBT Taxes Net Income $2,800 $4,000 $6,000 $15,000 $5,000 Solution Choosing Depreciation Year 1 Year 2 $62.5 Mil $62.5 Mil $82.5 Mil ######## Year 3 $62.5 Mil $37.5 Mil MACRS depreciation is recommended because it quickly depreciates the pla generating a greater tax benefit to Zeta as a higher depreciation expense eq income which equals less income tax. Projected Net Income Year 2021 Year 2022 5,000 7,000 $0.0722 $0.0715 Year 2023 6,000 $0.0713 $400.0 Mil ######## $480.0 Mil $57.7 Mil $80.0 Mil $68.5 Mil $14.0 Mil $19.6 Mil $16.8 Mil $20.0 Mil $30.0 Mil $75.0 Mil $25.0 Mil $221.7 Mil $28.0 Mil $42.0 Mil ######## $35.0 Mil ######## $24.0 Mil $36.0 Mil $90.0 Mil $30.0 Mil $265.3 Mil $40.0 Mil $20.0 Mil $82.5 Mil $35.8 Mil $8.8 Mil $27.0 Mil $5.7 Mil $21.3 Mil $40.0 Mil $20.0 Mil ######## $77.9 Mil $8.8 Mil $69.1 Mil $14.5 Mil $54.6 Mil $40.0 Mil $20.0 Mil $37.5 Mil $117.2 Mil $8.8 Mil $108.5 Mil $22.8 Mil $85.7 Mil Projected FCF Monzas Lost Profit Volume Price Direct Costs (per car) Lost Profit (After-Tax) OCF CapEx Investment in NWC Opportunity Costs Alternative Land Use Lost Profit from Cannibalized Sales FCF WACC (From WACC Tab) NPV IRR 1,000 cars $65,000 $46,000 $15.0 Mil Year 0 $.0 Mil -$250.0 Mil -$10.5 Mil Year 1 Year 2 $103.8 Mil ######## $2.1 Mil $4.2 Mil -$15.0 Mil -$15.0 Mil -$15.0 Mil -$15.0 Mil -$15.0 Mil $69.6 Mil ######## -$15.0 Mil -$15.0 Mil $97.4 Mil -$275.5 Mil -$4.2 Mil Year 3 $123.2 Mil 0.00% $71.7 Mil 10.64% Six Scenarios 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 2021 $0.0715 $0.0718 $0.0706 $0.0716 $0.0714 $0.0713 $0.0722 $0.0716 $0.0716 2022 $0.0713 $0.0717 $0.0709 $0.0716 $0.0713 $0.0709 $0.0725 $0.0714 $0.0713 2023 $0.0713 $0.0717 $0.0705 $0.0714 $0.0714 $0.0705 $0.0730 $0.0713 $0.0712 ACRS Schedule Solution Legend Value given in problem Formula/Calculation/Analysis required Assumptions, Qualitative analysis or Short answer required Goal Seek, Scenario or Data Table cell Crystal Ball Input Crystal Ball Output 33% 45% 15% 7% Year 4 4,000 4,500 3,500 Year 5 3,000 3,500 2,500 10.50 cc/kWh 0.0735 $/Kwh Year 4 $62.5 Mil $17.5 Mil quickly depreciates the plant. Thus r depreciation expense equals less ncome tax. Year 2024 Year 2025 4,000 3,000 $0.0713 $0.0722 ######## $240.0 Mil $45.6 Mil $11.2 Mil $34.6 Mil # of cars X electricty per car (in kWH) X project electricity cost $8.4 Mil $16.0 Mil $12.0 Mil $24.0 Mil $18.0 Mil $60.0 Mil $45.0 Mil $20.0 Mil $15.0 Mil ######## $133.0 Mil $40.0 Mil $20.0 Mil $17.5 Mil $65.7 Mil $8.8 Mil $56.9 Mil $12.0 Mil $45.0 Mil $40.0 Mil $20.0 Mil $.0 Mil $47.0 Mil $8.8 Mil $38.2 Mil $8.0 Mil $30.2 Mil Year 4 $62.5 Mil Year 5 $30.2 Mil $2.1 Mil $6.3 Mil -$15.0 Mil -$15.0 Mil -$15.0 Mil -$15.0 Mil $34.5 Mil $6.5 Mil 2024 $0.0717 $0.0723 $0.0711 $0.0713 $0.0719 $0.0706 $0.0736 $0.0718 $0.0715 2025 $0.0727 $0.0731 $0.0718 $0.0714 $0.0730 $0.0710 $0.0749 $0.0726 $0.0724 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 Your assumptions Market value of equity is the Market Cap according to Yahoo, numbers were pulled from yahoo finance. See data source Finance Market value of debt was calculated from the formula MV = Enterprise Value - Market Cap + Cash and Equivalents. The marginal taxe rate is assumed to be 21%. Comparable Companies Unlevered Beta Company Levered Beta Market Value of Debt Market Value of Equity Debt/ Equity Target Debt/ Equity Target Marginal Tax Rate Relevered Beta Ford Motor Company Fiat Chrysler Automobiles Honda Motor Co., Ltd. General Motors Company Toyota Motor Corporation Median Mean Relevered Beta Mean Unlevered Beta Zeta WACC Calculation Company's Capital Structure Debt to Total Capitalization Equity to Total Capitalization Debt to Equity Ratio Cost of Equity Risk-free rate Market risk Premium Levered Beta Cost of Equity Cost of Debt Cost of Debt Taxes After Tax Cost of Debt WACC US Treasury Rate Damodaram Website ial sources remium and the risk Value given in problem Formula/Calculation/Analysis required Qualitative analysis or Short answer required d from yahoo finance. See data erprise Value - Market Cap + be 21%. Beta Equity/ Margina Total l Tax Assets Rate Unlevered Beta  l =  u  (1 + (1 − Tc )  u = D  E l D  1 + (1 − Tc )  E  Scenario Summary Reference High economic Low economic case growth growth Year 1 Year 2 Year 3 Year 4 Year 5 Result Cells: Project_NPV Project_IRR High oil price High Low oil oil and price gas supply Low oil and gas supply High Low renewable renewable cost cost Sales Volume Scenario Summary Reference Case High Sales Low Sales Sales Volume Volume 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 Project_IRR Notes: Current 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 Annual Growth 0.50% Year 1 electricity cost for Breakeven Year 0 Electricity Price EBIT Interest EBT Taxes Net Income OCF CapEx Investment in NWC Opportunity Costs Alternative Land Use Lost Profit from Cannibalized Sales FCF WACC (From WACC Tab) NPV IRR 8.00% Year 1 Year 2 Year 3 Year 4 Solution Legend Year 5 Value given in problem Formula/Calculation/Analysis required Assumptions, Qualitative analysis or Short answer required Goal Seek, Scenario or Data Table cell Crystal Ball Input Crystal Ball Output Zeta Spenza Project Given Monza's sales in 2015 Monza's price Body materials Engine Drivetrain Battery Pack Electronics Labor (allocated) Overhead (allocated) 10,000 $65,000 Monza Cost structure per car $11,000 $4,000 $6,000 $20,000 $5,000 $4,000 $2,000 Consulting Fees Spenza Price $50,000 $80,000 Spenza Sales projections Sales Volume (number of cars) Year 1 5,000 Year 2 7,000 Plant Investment Plant Capacity Project life Percentage of Debt Financing Interest Rate Tax rate $250 Mil Uniform distribution from 125 to 375 Mil 10,000 cars 4 years 50% Uniform distribution from 25 to 75 % 7.00% Uniform distribution from 4 to 10 % 21% NWC as % of sales Monza Sales Cannibalization 4.75% Uniform distribution from 4% to 5.5 % 1,000 cars Uniform distribution from 500 to 1,500 Electricity cost Carbon Body Cost per Car Percentage of electricity $0.07 per kWh 70% of national average $14,000 80% Electricity used per car Other Spenza direct costs Body materials (other than electricity) Engine Drivetrain Battery Pack $4,000 $6,000 $15,000 Uniform distribution from $ 10 to 20 K Electronics $5,000 Solution Projected Net Income Year 1 Year 2 5,000 7,000 Uniform distribution with +- 500 units around projected v Sales Volume Projected electricity cost (per kWh) Distribution assumption Triangular distribution with min and max - 10% away from Revenues Direct Costs Body materials(electricity only) Body materials(other than electricity) Engine Drivetrain Battery Pack Electronics Total Direct Costs Fixed Costs Labor Overheads Depreciation EBIT Interest EBT Taxes Net Income Projected FCF Monzas Lost Profit Volume Price Direct Costs (per car) Lost Profit (After-Tax) OCF CapEx Investment in NWC Opportunity Costs Alternative Land Use 1,000 cars $65,000 Lost Profit from Cannibalized Sales FCF WACC (From WACC Tab) NPV IRR 8.00% MACRS Schedule year 1 33% year 2 45% year 3 15% year 4 7% Year 3 6,000 m 125 to 375 Mil m 25 to 75 % m 4% to 5.5 % m 500 to 1,500 m $ 10 to 20 K Year 4 4,000 Solution Legend Value given in problem Formula/Calculation/Analysis required Assumptions, Qualitative analysis or Short answer required Goal Seek, Scenario or Data Table cell Crystal Ball Input Crystal Ball Output Year 5 3,000 Year 3 Year 4 Year 5 6,000 4,000 3,000 +- 500 units around projected volume each year, correlation 0.6 th min and max - 10% away from the mean, correlation 0.7 Electricity Prices Forecast (Prices in Nominal cc/kWh) Source: U.S. Energy Information Administration https://www.eia.gov/outlooks/aeo/data/browser/#/?id=8-AEO2020®ion=0-0&cases=ref2020~highmacro~lowma To see the chart and the table at the source website, please copy and paste the entire URL above instead of clicking o High Low Reference High oil Low oil High oil and Low oil and economic economic case price price gas supply gas supply growth growth Year 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 10.31 10.21 10.19 10.18 10.24 10.39 10.51 10.56 10.49 10.40 10.38 10.32 10.24 10.27 10.26 10.18 10.13 10.08 10.10 10.05 9.98 9.95 9.93 9.87 9.87 Prices are in nominal cents/kWh 10.34 10.25 10.24 10.24 10.33 10.44 10.58 10.60 10.52 10.43 10.41 10.37 10.31 10.32 10.29 10.22 10.17 10.09 10.09 10.10 10.04 10.04 10.00 9.93 9.96 10.24 10.09 10.13 10.07 10.16 10.26 10.38 10.42 10.39 10.30 10.20 10.15 10.07 10.06 10.03 9.97 9.89 9.81 9.75 9.74 9.65 9.57 9.56 9.48 9.46 10.35 10.23 10.23 10.20 10.19 10.20 10.22 10.17 10.09 9.97 9.91 9.92 9.86 9.86 9.82 9.76 9.70 9.63 9.57 9.57 9.55 9.55 9.58 9.55 9.58 10.25 10.20 10.18 10.20 10.27 10.43 10.47 10.54 10.51 10.47 10.46 10.41 10.43 10.43 10.39 10.36 10.34 10.32 10.28 10.30 10.24 10.21 10.17 10.12 10.12 10.33 10.19 10.13 10.07 10.08 10.14 10.22 10.20 10.15 10.02 9.97 9.92 9.89 9.87 9.83 9.77 9.74 9.71 9.66 9.62 9.59 9.56 9.54 9.49 9.43 10.28 10.32 10.36 10.42 10.51 10.70 10.87 10.89 10.93 10.86 10.83 10.88 10.89 10.95 10.94 10.92 10.87 10.83 10.78 10.78 10.80 10.80 10.78 10.70 10.73 =ref2020~highmacro~lowmacro~highprice~lowprice~highogs~lowogs~hirencst~lorencst~aeo2019ref&start=2020&end=2043& L above instead of clicking on the link directly High Low renewable renewable cost cost 10.33 10.23 10.19 10.17 10.22 10.34 10.47 10.52 10.51 10.37 10.33 10.30 10.25 10.26 10.16 10.13 10.08 10.04 10.00 9.95 9.92 9.88 9.83 9.74 9.72 Electricity Prices Forecast (Prices in N 11.20 11.00 10.80 10.60 10.40 Cents/kWh 10.33 10.23 10.20 10.18 10.25 10.38 10.52 10.59 10.55 10.46 10.41 10.37 10.34 10.33 10.31 10.25 10.23 10.18 10.16 10.16 10.14 10.16 10.09 10.06 10.05 10.20 10.00 9.80 9.60 9.40 9.20 eo2019ref&start=2020&end=2043&f=A&linechart=~~~~~~~~~~~~~~~~~~~~ref2020-d112119a.61-8-AEO2020~highmacro-d ices Forecast (Prices in Nominal cc/kWh) 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 19a.61-8-AEO2020~highmacro-d112619a.61-8-AEO2020~lowmacro-d112619a.61-8-AEO2020~highprice-d112619a.61-8-AEO hprice-d112619a.61-8-AEO2020~lowprice-d112619a.61-8-AEO2020~highogs-d112619a.61-8-AEO2020~lowogs-d112619a.61 2020~lowogs-d112619a.61-8-AEO2020~hirencst-d112619a.61-8-AEO2020~lorencst-d120119a.61-8-AEO2020~&ctype=linech -AEO2020~&ctype=linechart&sourcekey=0 Purchase answer to see full attachment Tags: financial analyst Zeta Auto Car Production car manufacturer capital budgeting decision process production plant expansion User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.