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