Otobai Company in Osaka, Japan is considering the introduction of an electricall

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 ¥16.0 billion. The cost of capital was assumed to be 10%. The initial investment can be depreciated on a straight-line basis over the 10-year period, and profits are taxed at a rate of 50%. Consider the following estimates for the scooter project. Market size 1.20 million Market share 0.1 Unit price ¥ 500,000 Unit variable cost ¥ 460,000 Fixed cost ¥ 2.10 billion What is the NPV of the electric scooter project? (Negative amount should be indicated by a minus sign. Enter your answer in billions. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Please show calculations

Explanation / Answer

Step 1 : Determining the net cash flow from the project:

Number of units sold = Market size x market share = 1.2mn x 0.1 = 0.12mn units

Sales (0.12mn x 500,000) 60,000mn

Less : Variable cost (0.12mn x 460,000) (55,200mn)

Less : Fixed Cost (2100mn)

Less : Depreciation (16bn/10 =1.6bn) (1600mn)

-------------------

EBT 1100mn

Less: Tax@50% (550mn)

-----------------------

PAT $550mn

Cash Flow = PAT or Net Income + Depreciation = $550mn + $1600 mn = $2150 mn

Discounting the cash flows @ 10% = $2,150 / 1.1 = $1,954.54 mn

NPV = PV of cash Inflows - Initial Investment

NPV = $1,954.54 - $1,600

NPV = $ 354.54 mn or 0.3545 billion

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