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 accelerated schedule of depreciation). You have a choice to use 3 year MACRS depreciation schedule( see the Excel sheet attached) If you recommend setting up the plant, you should also consider that the plant will require land which the firm can put to other uses. These alternative uses will earn the firm $ 15 M annually. Modeling Financial Metrics and Cash FlowsDepreciation You have to decide whether Zeta should set up the plant to produce the Spenza’ s by answering the following series of questions. After having enumerated the various cash flows you are now ready to analyze the project using capital budgeting techniques and project analysis methods.
· What will be the depreciation for tax purposes from the investment in the Spenza plant using the straight line method? What will be the