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.)

Explanation / Answer

Initial investment cost of capital Depreciation per year Tax rate Market size Market share unit price Unit variable cost Fixed cost Project life 16,000,000,000 10% 1,600,000,000 50% 1,200,000 10% ¥ 500,000 ¥ 460,000 2,100,000,000 10 years Operating cash flow = (yearly sales - depreciation - variable cost per unit - fixed cost per year) X tax rate OCF = (6X10e10 - 1,600,000,000 - 5.52e10 - 2,100,000,000) X 0.5 OCF = 550,000,000 Year cash flows discount rate@ 10% Present value of cash flows 0 16,000,000,000 1 550,000,000 0.909 499950000 2 550,000,000 0.826 454300000 3 550,000,000 0.751 413050000 4 550,000,000 0.683 375650000 5 550,000,000 0.621 341550000 6 550,000,000 0.564 310200000 7 550,000,000 0.513 282150000 8 550,000,000 0.467 256850000 9 550,000,000 0.424 233200000 10 550,000,000 0.386 212300000 3379200000 Net present value of the electric scoter project= -16000000000 + 3379200000 NPV = - 12,620,000,000

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