Using data from 2016, ranked the following options: (based on ROI and value cont

Question

Using data from 2016, ranked the following options: (based on ROI and value contribution)

Option 1: investing an additional 3.5 billion euro into added plant and equipment while simultaneously reducing cost of capital to 5.75%

Option 2: achieving a target of increasing OPAT (operating profits after tax) by 8%

Option 3: No additional investment in plant and equipment increasing OPAT (operating profits after tax) by 15%. however, in order to do so your cost of capital must rise from 6.2% to 7.5%

RETURN ON INVESTMENT (ROI) AND AUTOMOTIVE DIVISION VALUE CONTR?BUT?ON IN THE C milion 2016 2015 Operating result after tax Invested capital (average) Return on investment (ROI) in % 7,419 -203 91,020 84,289 8.2 6.2 5,643 1,775 Cost of capital in % Cost of invested capital 6.8 5,732 5,935 Value contribution 1 Including proportionate inclusion of the Chinese joint ventures (including the relevant sales and component companies) and allocation of consolidation adjustments between the Automotive and Financial Services divisions The analysis period for the beta factor calculation spans five years with annual beta figures on a delly basis and an average subsequently being calcuiated. A beta factor of 1.22 (1.28) was determined for 2016 COST OF CAPITAL AFTER TAX AUTOMOTIVE DIVISION 2016 2015 1.2 6.5 1.8 0.7 Risk-free rate MSCI World Index market risk premium Volkswagen-specific risk premium (Volkswagen beta factor) Cost of equity after tax Cost of debt Tax 6.5 8.7 1.7 -0.5 1.2 66.7 33.3 6.2 9.5 2.0 -0.6 1.4 66.7 33.3 Cost of debt after tax Proportion of equity Proportion of debt 6.8 Cost of capital after tax The cost of debt is based on the average yield for long-term debt. As borrowing costs are tax-deductible, the cost of debt is adjusted to account for the tax rate of 30%. A weighting on the basis of a fixed ratio for the fair values of equity and debt gives an effective cost of capital for the Automotive Division of 6.2 (6.8)% for 2016

Explanation / Answer

Option 1: Investing additional 3.5 billion euros-

Option 2: Increasing OPAT by 8%

Option 3:Increasing OPAT and Cost of Capital-

Based on ROI- 3,2,1

Based on Value contribution- 2,1,3

Operating Result After Tax 7419 Invested Capital 91023.5 Return on Investment(ROI) 8.2 Cost of Caiptal in % 5.75 Cost of Capital Invested 5234 Value Contribution 2185

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