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Zeta Monza, resulting in 1,000 fewer units of the Monza sold in each
of the 4 years. Monza’s are priced at $65,000.
After 4 years it is expected the Spenza will be phased out, and the
plant will be put to other uses generating $15 M annually. However,
this decision can be reevaluated at the end of year 3, based on new
information which will become at that time. Your consultant has
prepared her estimates of what this new information might be. These
estimates are given in the attached Excel spreadsheet.
The cost of setting up the plant is to be $250 M with annual
manufacturing capacity of 10,000 cars. In addition, at the beginning
of each year the plant will require the Net Working Capital outlay
equal to 4.75% of direct manufacturing costs (excluding labor and
overheads) in the coming year. The NWC outlay will be recovered
after 4 years.
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. 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 electricity cost projections 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