Question

BYD automotive must choose between two directions for the automaker’s future: developing fully electric-powered car or a hybrid-powered car. The company has $30 million capital available at a cost of capital of 10%. The $30 million capital needs to be paid back in 3.5 years.

A) The hybrid car project calls for investment of $10 million to build plant and assembly lines right now. For the next four years, the project cash flow from the project will be $5 million, $3 million, $3.5 million, and $3.5 million, respectively. After that, the project will be close down with no salvage value.

B) The electric car project calls for $20 million investment to purchase patents and another $10 million to build plant and assembly lines right now. For the next four years, the project cash flow from the project will be $15 million, $9 million, $9 million, and $11 million, respectively. After that, the project will be close down with no salvage value.

1. Use the above information, fill the table of cash flow (careful about positive or negative sign of the cash flow) for each project.

Project Hybrid Car		Project Electric Car
Year	Cash Flow	Year	Cash Flow
0		0
1		1
2		2
3		3
4		4

2. Based on the capital budgeting decision rules, calculate the Payback Period (PB), Discounted Payback Period (DPB), Net Present Value (NPV), and Profitability Index (PI) for each project.
3. Use Excel function to calculate the Internal Rate of Return (IRR) for both projects.

Answer 1

B8 - fx =IRR(B3:37) B C D 1 Hybrid Car 2 year Cash flows pv@10% Present value Cumulative Cash flows Discounted Cumulative Cash Flows 0 $ (1,00,00,000.00) 1.0000 $ (1,00,00,000.00) $ (1,00,00,000.00) $ (1,00,00,000.00) 1 $ 50,00,000.00 0.9091 $ 45,45,454.55 $ (50,00,000.00) $ (54,54,545.45) 5 2 $ 30,00,000.00 0.8264 $ 24,79,338.84 $ (20,00,000.00) $ (29,75,206.61) - 3 $ 35,00,000.00 0.7513 $ 26,29,601.80 $ 15,00,000.00 $ (3,45,604.81) 7 4 $ 35,00,000.00 0.68301 $ 23,90,547.09 | $ 50,00,000.00 $ 20,44,942.29 IRR 19.79%||NPV $ 20,44,942.29 Payback Period 2+2000000/3500000 2.57 Years Discounted Payback = 3+345604.81/2390547.09 3.14 Years 1+NPV/Initial Investment 1+2044942.29/10000000 1.20

fx =IRR(13:17) N 18 H 1 Electric car 2 year Cash flows pv@10% $ (3,00,00,000.00) $ 1,50,00,000.00 2 $ 90,00,000.00 3 $ 90,00,000.00 4 $ 1,10,00,000.00 18.60%||NPV Present value Cumulative Cash flows Discounted Cumulative Cash Flows 1.0000 $ (3,00,00,000.00) $ (3,00,00,000.00) $ (3,00,00,000.00) 0.9091 $ 1,36,36,363.64 $ (1,50,00,000.00) $ (1,63,63,636.36) 0.8264 $ 74,38,016.53 $ (60,00,000.00) $ (89,25,619.83) 0.7513 $ 67,61,833.21 $ 30,00,000.00 $ (21,63,786.63) 0.6830 $ 75,13,148.01 $ 1,40,00,000.00 $ 53,49,361.38 53,49,361.38 IRR Payback Period 2+6000000/9000000 2.67 Years Discounted Payback 3+2163786.63/7513148.01 3.29 Years 1+NPV/Initial Investment 1+5349361.38/30000000 1.18