Otobai Company in Osaka, Japan is considering the introduction of an electricall
ID: 2780995 • Letter: O
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 ¥15 billion. The cost of capital is 10%. 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:
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.)
Market size 1.1 million Market share .1 Unit price ¥ 400,000 Unit variable cost ¥ 360,000 Fixed cost ¥ 2 billionExplanation / Answer
Market size = 1.1 million units
Market share = 0.1
Production volume = 1.1 million units * 0.1 = 0.11 million units
Unit selling price = ¥400,000
Unit variable cost = ¥360,000
Unit contribution margin = Unit selling price – Unit variable cost = ¥400,000 - ¥360,000 = ¥40,000
Total contribution margin = ¥40,000*0.11 million units = ¥4,400 million
Fixed costs = ¥2 billion = ¥2,000 mllion
Annual depreciation = Initial investment/Useful life = ¥15 billion/10 years = ¥1.5 billion = ¥1,500 million
Annual net income before taxes = Contribution margin-Fixed costs –Depreciation
Annual net income before taxes = ¥4,400 million - ¥2,000 million - ¥1,500 million = ¥900 million
Tax rate = 50%
Annual net income = ¥900 million * (1 – 0.50) = ¥450 million
Annual free cash flows = Annual net income + Annual depreciation = ¥450 million + ¥1,500 million = ¥1,950 million
Present value of annuity = Annuity amount*{1-(1+r)-n}/r
Present value of annual free cash flows = ¥1,950 million * (1-1.10-10)/0.10 = ¥11,981.91 million
Initial investment = ¥15 billion = ¥15,000 million
Net present value = - Initial investment + Present value of annual free cash flows
Net present value = - ¥15,000 million + ¥11,981.91 million = -¥3,018.09 million = -¥3.018 billion
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.