UKCustomPapers | Calculating Financial Metrics for Elon Motors' Battery Production Project

Calculating Financial Metrics for Elon Motors’ Battery Production Project

Scenario:
Elon Motors produces electric automobiles. In recent years, they have been making all components of the cars, excluding the batteries for each vehicle. The company’s leadership team has been considering the ways to reduce the cost of producing its cars. The leadership team considered various options and believes Elon Motors could reduce the cost of each car if it produces the car batteries instead of purchasing from the current vendor, Avari Battery Company.

Currently, the cost of each battery is $325 per unit. Elon Motors feels that it could greatly reduce the cost if the production team makes each battery. To produce these batteries, the company will need to purchase specialized equipment. Cost of the new equipment is $1,570,000 with salvage value of $70,000 and a useful life of 10 years.

Currently, Elon Motors purchases 3,000 batteries per year, and expects that the production will remain the same for the coming 10-year period. To make batteries, Elon Motors has provided below the relevant data about the proposed project.

Purchase of direct materials at a cost of $125 per battery produced.
Employing three production workers to make the batteries. Each worker likely works for 2,080 hours per year and makes $25 per hour. In addition, health benefits will amount to 20% of the workers’ annual wages.
The variable manufacturing overhead costs are estimated to be $25 per unit.
Because there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted.
Cost of capital (hurdle rate) has been determined to be 10% for all new projects, and the current tax rate of 30% is anticipated to remain unchanged.
The pricing for the company’s products as well as number of units sold will not be affected by this decision.
Elon Motors uses straight-line method to depreciate the equipment.
Required Items

Based on the above information and using the provided Excel template (Files), calculate the following items for the proposed equipment purchase.
Annual cash flows over the expected life of the equipment
Payback period
Accounting rate of return
Net present value
Internal rate of return
Modified Internal rate of return

Sample Answer

Calculating Financial Metrics for Elon Motors’ Battery Production Project

Thesis Statement

Elon Motors has the opportunity to reduce costs and increase profitability by producing its own car batteries instead of purchasing from a vendor. By analyzing the financial metrics of this proposed project, including annual cash flows, payback period, accounting rate of return, net present value, internal rate of return, and modified internal rate of return, we can determine the feasibility and potential benefits of this strategic decision.

Annual Cash Flows Calculation

To calculate the annual cash flows over the expected life of the equipment, we need to consider the relevant costs and revenues associated with producing the batteries in-house. The annual cash flows can be determined by subtracting the total costs from the total revenues generated each year.

Total Revenues:

– Number of Batteries Purchased Annually: 3,000
– Cost of Each Battery Purchased: $325
– Total Annual Revenue from Battery Sales: 3,000 * $325

Total Costs:

1. Direct Materials Cost per Battery: $125
2. Production Workers’ Wages:- Number of Production Workers: 3
– Hours Worked per Worker Annually: 2,080
– Wage per Hour: $25
– Health Benefits (20% of Wages): 0.20 * (3 * 2,080 * $25)

3. Variable Manufacturing Overhead Cost per Unit: $25

Adding these costs together will give us the total cost per battery produced.

Payback Period

The payback period is the time it takes for a project to recover its initial investment. It is calculated by dividing the initial investment by the annual cash flows.

Accounting Rate of Return

The accounting rate of return measures the profitability of an investment and is calculated by dividing the average annual accounting profit by the average investment.

Net Present Value (NPV)

The net present value is a measure of a project’s profitability in today’s dollars. It is calculated by subtracting the initial investment from the present value of the expected future cash flows.

Internal Rate of Return (IRR)

The internal rate of return is the discount rate that makes the net present value of all cash flows from a particular project equal to zero. It represents the project’s expected rate of return.

Modified Internal Rate of Return (MIRR)

The modified internal rate of return adjusts for potential changes in cash flows over time and provides a more accurate reflection of a project’s profitability.

By analyzing these financial metrics, Elon Motors can make an informed decision regarding the production of car batteries in-house. This strategic move has the potential to enhance cost efficiency and drive profitability in the long run.

This question has been answered.

Get Answer

Our Free Services

Paper Formatting

No Lateness!

Our Guarantees

Calculating Financial Metrics for Elon Motors’ Battery Production Project

Sample Answer

This question has been answered.

Our Services

Daily Statistics

Why Choose Us