CASE STUDY 1: Energise Autos plc. Energise Autos plc is a UK based car battery manufacturer. The company has been operating in the UK for the past 15 years. Although demand for car batteries have been moderate over the years, the company has been receiving increasing orders because of the UK Government’s target to fully support production of Electric Vehicles (EVs) from the year 2030 onwards. Energise Autos plc is currently searching for locations to establish car battery manufacturing plants in the Midlands. Two areas have been identified as possible locations for the manufacturing plants. However, the company can only commit to one area only. The company established a Project Feasibility Committee (PFC) to undertake market research. The Committee’s remit is to assess the viability and feasibility of establishing the manufacturing plants in either of two locations in the Midlands. The PFC has concluded its research and recommended establishing the plant in either Birmingham or Coventry. The cost incurred in the research amounted to £1.4 million. The PFC has also collated forecasted financial cash flows data, and other information. The details of the two projects are given below. The company’s cost of capital is 10%. Proposal 1: Birmingham Factory (BF) Forecast figures: £'000 Year 0 1 2 3 4 5 Initial investment (22,500) Sales Revenue 7,600 7,800 8,900 10,400 11,600 Cumulative working capital (200) (360) (400) (400) (480) 0 Less: Material assembling costs (720) (740) (840) (1,080) (1,060) Labour costs (240) (350) (340) (380) (360) Overheads (980) (920) (960) (970) (960) The table above shows the estimated outgoings and inflows for manufacturing the car batteries. Included in the initial investment of £22,500,000 above are production machineries costing a total of £1,200,000. Energise Autos plc is entitled to tax depreciation (or capital allowances) at the rate of 20% on cost. All the above estimates have been prepared in terms of present-day cost and prices. Assume that cash flows arise at the end of each period and that the company’s corporate tax rate is 25% throughout the period. Assume also that corporate tax is payable (or recoverable) a year following the year in which profit (or loss) is earned. At the end of the five-year period, the machineries will be sold for £ 540,000 and the working capital investment will be recouped in full. In addition: • Revenues are expected to rise by 2% in price terms per year from year 1 (start of year 1) • Material assembling costs are expected to rise by 3% per year from year 1 (start of year 1). • Labour costs are expected to remain as stated above. • Overheads are expected to rise by 2% per year from year 1 (start of year 1). Proposal 2: Coventry Factory (CF) Establishing a factory in Coventry is the second of the two proposals> The expected production life of this factory will also be 5 years and the cost, expected revenue, Material Assembling costs, labour and overheads are as follows: Draft figures £'000 Year 0 1 2 3 4 5 Initial investment (20,000) Sales Revenue 6,600 6,800 7,800 10,200 11,800 Cumulative working capital (180) (240) (320) (300) (360) 0 Less: Material assembling costs (610) (680) (750) (980) (1,020) Labour costs (240) (350) (340) (380) (360) Overheads (940) (960) (970) (980) (980) The above table also shows the estimated outgoings and inflows for manufacturing the car batteries. Included in the initial investment of £20,000,000 above are production machineries costing a total of £1,000,000. Energise Autos plc is entitled to tax depreciation (or capital allowances) at the rate of 20% on cost. All the above estimates have been prepared in terms of present-day cost and prices. Assume that cash flows arise at the end of each period and that the company’s corporate tax rate is 25% throughout the period. Assume also that corporate tax is payable (or recoverable) a year following the year in which profit (or loss) is earned. At the end of the five-year period, the machineries will be sold for £ 480,000 and the working capital investment will be recouped in full. In addition: • Revenues are expected to rise by 2.5% in price terms per year from year 1 (start of year 1) • Material assembling costs are expected to rise by 2% per year from year 1 (start of year 1). • Labour costs are expected to remain as stated above. • Overheads are expected to rise by 1.8% per year from year 1 (start of year 1).