Question: Option 1: A Fully Electric Model – SUV Electric The First Option Is For The Car Manufacturing Company To Produce An Electric Car. This Is Based On The Growing Popularity Of Electric Cars And The Reduced Taxation Offered By The Government As An Incentive To Car Manufacturers For The Production Electric Vehicles. At The Same Time, The Electric Model Is …

Option 1: a fully electric model – SUV electric
The first option is
for the car manufacturing company to produce an electric car. This
is based on the growing popularity of electric cars and the reduced
taxation offered by the government as an incentive to car
manufacturers for the production electric vehicles. At the same
time, the electric model is expected to have a higher production
cost as it will require significant investment to develop the
necessary production line. The production will require special
software that will need to be maintained and updated every year.
Before the production begins, the production staff will need
training in the use new production line and the specialist
software. The HR team suggests that the company will benefit from
this project by building key skills required to produce
environmentally friendly vehicles.
The investment in the
production line equipment and the staff training will be fully
depreciated by the end of the project using the straight-line
method.
The team has produced the following
projections for the electric model (SUV electric).
Table 1: Projections for the electric model (SUV electric)

Projected sales and
costs

Total

Expected sales in units of the SUV
electric in year 1

10,000

Year-on-year change in sales

3%

Selling price per unit of the SUV
electric

£52,500

Cost per unit of SUV electric:

Labour

10% of selling price

Material

50% of selling price

Special battery

10% of selling price

Annual maintenance and update of
software

£250,000

Investment in production line (required
in year 0)

£500,000,000

Training of staff (required in year
0)

£10,000 ,000

Working capital required in year 0 and
recovered at the end of the project
in year 5

£20,000,000

Corporation tax rate (reduced for
electric vehicles)
The tax is paid in cash in the year
that the profit is recorded.

15%

Cost of capital

13%

Duration of the project

5 years

Option 2: hybrid model – SUV
Hybrid
The second option is
to produce a hybrid electric car. The hybrid option reflects the
concerns raised by some older members of the production team about
moving to a fully electric model. These experienced mechanics
argued that the company’s expertise is in producing conventional
vehicles, and this should not be abandoned by switching to the
production of fully electric vehicles.
The production line of
the hybrid model will require a lower initial investment than the
electric model. Also, since a great part of the hybrid model’s
technology will be based on the conventional combustion engine,
there is no need for staff training. Although estimated to be
higher than conventional cars, the year-on-year growth in the sales
of hybrid cars is expected to be lower than electric cars. The
price of the Hybrid model is lower than the Electric model as it
reflects the lower production costs and the market price of similar
models. The profit made from the production and sale of hybrid cars
is not subject to tax incentives. The investment in the production
line equipment will be fully depreciated by the end of the project
using the straight-line method.
The team has produced the following
projections for the hybrid model (SUV Hybrid).
Table 2: Projections for the hybrid model (SUV Hybrid)

Projected sales and
costs

Total

Expected sales in units of the SUV
Hybrid in Year 1

12,000

Year-on-year change in sales

1%

Selling price per unit of the SUV
Hybrid

£31,000

Cost per unit of the SUV Hybrid:

Labour

8%

Material

50%

Hybrid technology

10%

Annual maintenance of production
equipment

£100,000

Investment in production line

£410,000,000

Working capital required in year 0 and
recovered at the end of the project in
year 5

£15,000,000

Standard corporation tax rate
The tax is paid in cash in the year
that the profit is recorded.

20%

Cost of capital

13%

Duration of the project

5 years

Task

Write a report to the Executive Board of ImagineSLA
to:

Present your findings from 1.a) and 1.b) and explain your
recommendation about the most suitable car model to be produced
based on the investment appraisal methods’ outcomes.

Discuss any other factors that the Executive Board needs to
consider when making their final decision. Reflect on broader
qualitative and quantitative factors that may affect each car
model’s attractiveness and profitability in the longer term.

c. Outline the advantages and limitations of each of the methods
you have used.