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ACC211 Task 1: Project evaluation (Case Study) Page 1 of 6 ACC211 Task 1: Project Evaluation (Benz-Lancer EV Case Study) Due Date: (Sunday) 23 April 2023 by 11.59pm (AEST) Product: Excel based feasibility study with short answer questions Assessment Weight: 50% Questions: 5 in total Benz-Lancer Electric Vehicles Inc. is a newly established electric vehicle (EV) company based in Australia, founded and led by former Tesla battery engineer, Alan Wong. Benz-Lancer aims to enter the EV markets in Australia and Thailand as it has identified two unaddressed opportunities in the market: highly efficient batteries and unique body styles. Market Gap Assessment • Battery o 2,200kms per charge o Maintains 85% of initial charge over 10 years with minimal degradation. • Vehicles o SUV: For urban and suburban consumers (with a payload of 2,000kgs) o Sedan: Four-door, cost-effective and high-performing solution (competitors' offerings are above $120,000, with a range of 1,000kms max) o Hatchback: Five-door, 2WD for daily commuting and leisure (first of its kind) Benz-Lancer has invested $300 million in research and development of EVs, resulting in the creation of three prototypes: SUV, Sedan, and Hatchback. These vehicles address the market gaps identified by Benz-Lancer. Product Description • SUV: 2WD high-performance SUV for urban and suburban consumers. It features a smart stereo, reversing camera, air-conditioning, and 2 seats. The Terra offers a range of 2,300kms and takes 10 minutes to charge. • Sedan: Four-door, cost-effective sedan for families and the ride-share market. It offers competitive features, including a range of 2,500kms and a charge time of 9 minutes. • Hatchback: Five-door, 2WD hatchback for daily commuting and leisure. It has a range of 2,100kms and a charge time of 8 minutes. Project’s Strategy Alan Wong, CEO of Benz-Lancer, has requested a feasibility study to evaluate the financial viability of producing these three EVs. The proposed strategy includes sales, cost, and revenue projections, along with factors that impact production volume and timing. Details of the proposed project Below is a breakdown of the proposal. • Target markets: Australia and Thailand. All sales will be conducted in AUD. • Project lifespan: 10 years starting from 01/07/2023. • Net Working Capital: $45 million required at the start of the first year and to be recuperated in the final year. • Marketing: brand awareness: 17% of projected sales revenue each year. • Corporate Tax: 30% in Australia. • Discount Rate: o The projects capital structure will be 60% equity and 40% debt. ACC211 Task 1: Project evaluation (Case Study) Page 2 of 6 o Comparable operations are seeing equity holders demanding 13% in returns. Benz-Lancer EV expects the price they pay for equity will be 15%, given the current conditions. o You have approached Matt McKeon from KPMG for help concerning debt financing. He has advised that they can fund the portion of debt at 11% interest. This is 3.5% above market rates, although it is the best you can find. o Given this information, you have concluded that you must meet a weighted average capital cost (WACC) of 13.40% to satisfy both equity and debt holders. This means the required rate of return ® or discount factor is 13.40%. Facilities • The projects EV distribution strategy requires one facility to be in Australia and one to be in close proximity to the Thailand markets. Facility and Asset Management Director, Alana Johnson, has recommended the production to be in Perth, Australia, and Pattaya, Thailand. This is a strategic decision as it is due to the ‘clustering’ of manufacturing skills around these areas. Johnson has identified two lots: o Address: 70-99 Midland Drive, Perth, Western Australia. Price: $28,000,000 incl. fees and charges. Projected annualised growth rate 2023-2033: 5% (disposal) which means facility price increase by 5% every year. o Address: 310-330 Pattaya Industrial Park, Chon Buri, Thailand
Price: $16,500,000 incl. fees and charges. Projected annualised growth rate 2023-2033: 6.5% (disposal) which means facility price increase by 6.5% every year. • Julian Hart, the Chief Cost Estimator, has found that both facilities require a fit-out of equipment to be installed before production can begin. This cost will be incurred immediately at the start of the project o Perth Facility equipment cost: $60,000,000 o Pattaya Facility equipment cost: $45,000,000 Each facility requires two updates during the project's life, with the first at the start of year 3 and is estimated to cost 40% of the original fit-out (in today's dollars/value in year 3), and the next at the start of year 6, also estimated at 40% of the original fit-out (in today's dollars/value in year 6). Julian expects inflation for this capital equipment to be 1.8% per year between year 0 and year 3, and 2.9% per year between year 3 and year 6. The updates will be added to existing equipment. The expected selling price of the equipment at the end of the project is estimated to be $29,000,000 and book value is zero. • Depreciation will use straight-line method over a 10-year period and will only apply to equipment. Ignore Depreciation for Building. Sales • Alan Wong has projected price and sales forecasts based on yearly demand for the EV's. Sales start in year 1 with the SUV and Sedan models. In years 2 and 5, a drop in sales is expected, leading to updates and price increases for these two models. • The Hatchback model will be introduced in year 5 with no update required. • Sales volume and price breakdown for each model is provided. ACC211 Task 1: Project evaluation (Case Study) Page 3 of 6 Benz-Lancer EV – Annual Sales Volume (Units) Unit Sales Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 SUV 0 7,000 6,500 7,800 11,400 10,200 15,700 16,000 16,900 17,300 15,900 Sedan 0 5,000 4,900 6,900 8,200 7,500 11,300 12,100 12,400 12,500 11,700 Hatchback 0 0 0 0 0 4500 6,500 6,700 8,100 9,150 8,700 Total Sales Volume 0 12,000 11,400 14,700 19,600 22,200 33,500 34,800 37,400