The Strategy of Square Wheel Motors - Example

CASE STUDY ON SQUARE WHEEL MOTORS (“SWM”) Background Square Wheel Motors (“SWM) is a family-owned business based in England and recognized as a established dealer of brand new and second hand cars catering to mid-size markets and service centre. SWM has also ventured into luxury cars although its showrooms and service centers are found in prime locations. Presently, there are 30 SWN’s branches in Southern England. 3 options on real estate property Given a consistent 8-10% growth in its stream of earnings as shown by the £8.1 Million.post-tax profits at period ending financial year 2006, the management of SWM is considering among three options the best use of a company-owned real estate property located West of London. 1. Sell the land to a house builder; 2. Construct a second showroom and service centre for luxury cars only; 3. Construct another sales and service facilities for the existing mid-market volume car business. The property being used as a car park for a supermarket under a lease arrangement. Refer to detailed discussion of the above options. Summary of Analysis 1. Option 1 It is not recommended that the lot be sold because SWM is in the business where land is very important to its operations, and its value is being realized as evident in the local planning body’s willingness to approve development of the site. 2. Options 2 and 3 are similar because they both deal with setting-up facilities in line with their competency as dealer of cars. The difference lie in the type of car to sell: Option 2 – luxury cars, and Option 3 – mid-size cars (where they are popular). Despite difference in costs - variable and fixed at the base scenarios, both options exhibit the same financial performance, as summarized in the following table, covering 10 years of operations. OPTION 2 OPTION 3 Total Revenues £ 17.196 Million £ 17.196 Million % Revenue 100 % 100 % Variable Cost £ 8.6 Million £ 10.3 Million % VC to Revenues 50 % 60 % Fixed Cost £ 4.9 Million £ 3.3 Million % FC to Revenues 29 % 19 % Earnings Before Taxes £ 3.6 Million £ 3.6 Million % Earnings to Revenues 21 % 21 % Taxes (30%) £ 1.10 Million £ 1.08 Million % Taxes to Revenues 6 % 6 % Earning after Taxes £ 2.6 Million £ 2.5 Million %Earnings to Revenues 15 % 15 % Option 3 is more attractive because the growth prospects as shown by net present value and returns are higher due to lower construction cost ascribed to a less complicated structure compared to those for luxury cars, and the impact of taxation for capital expenditures. 2.1 Option 2 Opening a showroom and service centre for luxury exceeded the 10% benchmark rate set by SWM before projects can be considered. In fact, internal rate of return is around 11.98 %. The critical factors to be established though is the sustainability of luxury car sales which has experienced big drop during the last 5 years, and whether the site is strategically located to attract luxury car prospects. Option 2 was vulnerable to market impact as shown in the computation of sensitivities given a drop in sales or increase in fixed cost at a rate of 10%. 2.2 Option 3 Despite lower margins caused by higher variable expenses which may be due to low margins of mid-size cars, the option resulted in higher returns than Option 2. Its net present value is £ .465 Million, and rate of return is 17.61%. And unlike Option 2, it’s performance did not drop negatively to changes in assumptions. Other Considerations 1. SWM and its strength and weakness a. SWM’s core business has been in the sale and service of cars – the middle-size market and its recent entry into luxury cars. SWM’s strength are familiarity and expertise with the car business, and the goodwill established with the market. . Being a family business has its disadvantages. The family’s capacity to engage in other businesses outside its core may be slowed down if the organization is a closed system. Relying on family ties, its organization may revolve around relatives thereby discouraging the growth of a professional organization. SWM should realize that selling cars has become more complicated than ever. Awareness to pollution- smoke emissions, and rising cost of fuel may be deterrents to growth. Competition has likewise become more intense with the entry of lower priced vehicles from developing countries like India, Malaysia. 2. Outside the organization, SWM must also contend with the following external factors: The economy is forecasted to grow in a laggard pace considering the high internal inflation and interest and the impact of the global slowdown . New car markets, with occasional rise in sales, is generally expected to decline by as much as 5% in 2008 although a 2.5% increase in new car sales was recorded for 2007 for small cars and diesel; Sale of used cars, which experienced high growth rates in the early 2000s is again on the rise Luxury cars enjoy market acceptance although some brands have experienced substantial sales drop from 2000 – 20005 . Tax impact on CO2 emissions Recommendation: In view of the above, the provisional recommendations are as follows: 1. Between the three, Option III is indorsed. SWM may also undertake further study on the opportunities in used car business. 2. SWM should develop its organization to meet business challenges. 3. SWM should be open to expand its core competencies beyond car dealership. References: Society of Motor Manufacturer’s and Traders Limited (SMMT). Statistics and other data. Available at http://www.smmt.co.uk/dataservices/indanalysis.cfm?sid=-2&catid=553&maincatid=551&fid=&fid1=&fid2= Auto Industry. News. Available at http://www.autoindustry.co.uk/news/08-05-08_9 Barclay’s Commercial. Motor Dealer Review. April 2008, as downloaded from Internet in pdf format Various news from the web. Option I : Sell the land to a house builder. A Description of Scenario SWN is faced with 3 options related to the best use of its owned Land. 1. Status quo or maintain its being leased as car park; 2. Sell the land at £ 1.5 M after incurring professional fees or £ 75,000, thereby forever losing a valuable asset which may be strategically located; 3. Use the land for SWM expansion of showroom and service centre for luxury cars or its existing mid-size market cars B. Discussion on financials As the case is silent on the amount of lease paid as a car park, as per computation shown on Annex 1, the following are computed sensitivities on lease amount and provisional recommendation to management. An annual rental of £ 40,000 with an annual escalation of 10% - SWM would be better off selling the property. Present Value for 10 year revenues is computed at negative £ 358.69 Thousand. Annual rental of £ 120,000 with a 10% escalation – point of indifference between status quo and selling given a present value of £ 988 Thousand If SWN decides to sell its property, its net revenue given a 10% present value (based on benchmark rate) is £ 958 Thousand. Against foregone revenues of £ 40,000 per annum, disposition of land will result in net gain of £ 600 Thousand, whereas an assumed annual rental of £ 120,000 translates to being indifferent between selling and maintaining lease rentals. A rental of £ 120,000, if the amount does not represent existing price, could be attained if existing neighborhood supermarket values the car park and willing to pay the price than lose the property. (Refer to Annex 1 for financial computation. ) C. Other areas for consideration 1. Land is a valuable fixed asset that SWM should study thoroughly before disposition of owned property. Unlike depreciable assets like machines and equipment, land is expected to appreciate in value in the long-run, thus being idle is not an issue The fact that the local planning body is open to accept proposals for the vacant lot, is an indication of the commercial value of the property. 2. SWN should study the local physical plan, and actively participate in the local deliberations related to planning, focusing on the area where the lot is located to gain information on land classification – residential, commercial, industrial, development and master plan if any. 3. For the sake of argument, assuming SWM decides to sell and collects the £’ 1.425 Million net revenues, it must identify another project which will yield returns at par with its 10% benchmark rate for cost of capital for investment appraisal. 4. As its core business is in the selling and servicing of cars, premium lands are critical for building their showrooms and service centres. Lease prices go up with land valuations, and where businesses are found in prime areas, lease rental comprise substantial cost of operations. C. Proposed Action : Rather than sell the property, SWN can either maintain the lot as car park provided annual rental of £ 120,000. Or the company can utilize the land for establishing presence in luxury cars, or expand its existing mid-size market cars. Option II : Construction of sales and service facilities for luxury car A Description of Scenario SWM’s entry into the luxury car business – selling and servicing – was a recent move, where the company may be banking on the goodwill developed with customers having been recognized as a supplier of mid-size cars. Thus, the number of showrooms and service centres are fewer than its traditional product. B. Discussion on Financial Computations Based on SWM assumptions, revenues for the next 10 years total £17.2 Million or an average of £1.7 Million per year and net cash generation is estimated at £2.9 Million. The project is computed to yield a Net Present Value £ 139,270. This value was derived by exposing annual cash flows to the 10% benchmark rate for evaluation of capital investments and deducting the same to the cost of constructing the facilities of £ 1.5 Million. The Internal Rate of Return of option 2 which is the actual discounted rate of return is computed at 11.95% which is higher than their 10% benchmark. B.1 Sensitivity To determine the tolerance Option 2’s revenues and costs, the following sensitivities were assumed and computed: a. Impact of a 10% drop in revenues A mere 10% drop in sales revenues for luxury cars will result in a negative £ 179.14 in present value as the initial cost of the building of £ 1.5 Million cannot be recovered cash-wise in the stream of revenues that were subjected to the 10% benchmark rate. A drop in sales may be very real as further discussion below will show the drop in luxury car sales. It is therefore imperative that SWM sustain its targeted sales. b. Impact of a 10% increase in fixed cost In the event SWM goes through a period of economic volatility resulting in higher operating costs, as computed, a 10% increase will result in a negative present value of £ 44,600. Using the financial indicators, and in the context of the 10% benchmark rate for capital investments, it may be more beneficial to either maintain the property as a leased asset while negotiating for higher rentals. However, if the financial rate of return is to be used, Option 2, will yield a return of 11.98%. Refer to Annex II and following for the detailed financial computations. C. Other areas for consideration 1. It is very important for SWM to establish how strategic is the location vis-à-vis their intent to construct a showroom and service centre. Market studies must be undertaken to locate target market for luxury cars and their proximity or distance from the site. Would the established market size, if any, be compelled to visit the proposed showroom? 2. Furthermore, SWM must assess the long-term prospects of luxury car sales, In 2005, sales of BMW, Mercedes, Audi, and Jaguar dropped by more than 25% over the past 5 years. The factors contributing to the fall of volume are the the existing economic condition, and the propensity of existing car-makers to manufacture look-all cars, 3. SWM should also determine issues on foreign exchange and its effect on price as luxury cars tend to show more elasticity. 4. Marketing assistance from makers or distributors of luxury cars should be pursued to induce high-end buyers to purchase luxury cars. Given the slim margin per vehicle sold, the objective of requesting more marketing assistance is to be able to sell more cars. These would include such assistance as loan application, discounts in servicing, freebies. Option III : Construction of sales and service facilities for expansion of existing A Description of Scenario Being a recognized dealer of brand new and used cars in the mid-size market, the consideration of expanding its facilities to augment its presence in 30 locations would be a logical option. B. Discussion on Financial Computations Based on SWM assumptions, sales for the next 10 years will still hit £17.2 Million which is the same as Option II and assumed to be caused by more sales due to more affordable car prices. Cost of cars and other variable costs is assumed at 60% higher than the variable cost of luxury cars by 10 percentage points. Fixed cost is lower by £ .150 Million. Forecasted cash generation is £ 3.4 Million, about 17% higher than cash sourced from sales and service of operations of luxury car vehicles. Net Present Value is £ .465 Million, which means the higher present value was due to lower construction cost of £ 1.35 Million or 10% lower than computed cost for luxury car building. The Internal Rate of Return of option III which is the actual discounted rate of return is computed at 17.61 % which is higher than their 10% benchmark. B.1 Sensitivities As the financial attachments will show, SWM is relatively comfortable should a 10% drop occur in sales or a 10% increase in fixed cost since these will show positive present values of £ 123,330 and £ 300,510 respectively. Owing to an available market, the preference for mid-cars, SWN’s financials can withstand pressure on sales and cost. What are major factors which may cause the drop? Competition offering lower but quality cars and SWN’s inability to prepare A worsening economic situation which may result in higher prices for commodities The financial rate of return for Option 3 is 17.61% which it a preferred option over 2. Refer to Annex III and following for the detailed financial computations. C. Other areas for consideration 1. SWM must conduct a market study to determine how realistic are its projections. Other factors to be taken into consideration are volume of traffic, proximity to competition if any, and market preference in cars. 2. Marketing assistance from makers or distributors of luxury cars should still be pursued to induce buyers to purchase their mid-size market cars . Given a slimmer margin per vehicle sold, the objective of requesting more marketing assistance is to be able to sell more cars. These would include such assistance as loan application, discounts in servicing, freebies, test drive the vehicle, and open house to accommodate interested buyers. Annex I SQUARE MOTOR CORPORATION FINANCIAL STATEMENTS AND ASSUMPTIONS (£ ‘000) OPTION 1 – SELL LAND OR MAINTAIN EXISTING LEASE YR 0 YR1 YR2 YR3 YR4 YR5 YR6 YR 7 YR8 YR9 YR10 Period/Date 03-31-07 09-30-07 Rev from Land Sale 1,500 Professional Fee (75) Tax (30%) (450) Net Cash (75) 1,500 (450) Present value factor 0.9091 0.9091 0.8264 Net Present Value (34) 1,364 (372) NPV= £ 958 Sensitivity (not to sell) Revenue Loss - £ 40,000/yr with 10% inc. -40 -48.4 -53.2 -58.64 -64.42 -70.86 -77.95 -85.74 -94.32 -103.75 Present value Factor 0.83 0.75 0.68 0.62 0.56 0.51 0.47 0.42 0.38 0.35 Present Value PV= (£ 358.69) -33.2 -36.3 -36.2 -36.3 -36.07 -36.14 -36.6 -36.02 -35.84 36.32 Revenue Loss - £120,000/yr with 10% inc. -120 -132 -145 -160 -176 -193 -212 -234 -257 -283 Present value Factor 0.83 0.75 0.68 0.62 0.56 0.51 0.47 0.42 0.38 0.35 Present Value PV= (£ 988,000) -100 -99 -99 -99 -99 -98 -100 -98 -98 -99 Assumptions used: 1. Cost of professional fee is £75,000 payable on 31st March 2007 2. Price of land £1.5m, proceeds to be received before year-end 2007 3. Corporate tax is equivalent to 30% , and is applied the year immediately following year incurred 4. Net Present Value factor based on 10% as found in NPV tables 5. £ 40,000 and £ 120,000 are assumed lease rental rates and used for computational purposes and does not reflect actual amount Annex II SQUARE MOTOR CORPORATION FINANCIAL STATEMENTS AND ASSUMPTIONS (£ ‘ 000) OPTION 2- CONSTRUCT 2ND SHOWROOM AND SERVICE CENTER FOR LUXURY CARS 1 2 3 4 5 6 7 8 9 10 11 12 A. Profit & Loss Revenues 1,500 1,545 1,591 1,639 1,688 1,739 1,791 1,845 1,900 1,957 Variable Cost 750 773 796 820 844 869 896 922 950 979 Fixed Cost 450 459 468 478 487 497 507 517 527 538 Profit Before Tax 300 314 327 342 357 373 389 405 423 441 Tax – 30% 90 94 98 103 107 112 117 122 127 132 Profit After Tax 210 219 229 238 250 261 272 284 296 309 B. Cash Flow Profit Before Tax 300 314 327 342 357 373 389 405 423 441 Construction Cost -500 -1,000 Actual Tax Payment -30 -84 -23 -40 -55 -68 -80 -90 -99 -108 -116 Net Cash -500 -1.030 216 291 287 287 289 293 299 306 315 325 C. Present Value Present Value Factor .91 .83 .75 .68 .62 .56 .51 .47 .42 .39 .35 .32 Present Value -454.55 -851.24 162 199 178 162 148 137 127 118 111 104 Net Present Value 139.27 Assumptions used: 1. Construction cost at £1.5m, payable £0.5m in September 2007 and £1.0m on completion in September 2008. 2. Sales of luxury cars estimated at £1.5m, growing in real terms at 3% p.a. 3. Fixed costs would be £0.45m p.a. 4. Variable costs would be 50% of sales revenues. 5. General level of price inflation is assumed to be 2% and imputed pm fixed cost 6. Corporate tax is equivalent to 30% , and is applied the year immediately following year incurred 7. Net Present Value factor based on 10% as found in NPV tables 8. Annual tax allowances on capital expenditure are given at the rate of 20% p.a. on the declining balance. All tax effects of the three alternative projects can be assumed to impact actual cashflow exactly one year after the end of the year to which they relate. Annex II SQUARE MOTOR CORPORATION FINANCIAL STATEMENTS AND ASSUMPTIONS (£ ‘ 000) OPTION 2- CONSTRUCT 2ND SHOWROOM AND SERVICE CENTER FOR LUXURY CARS SENSITIVITY ON 10% DROP IN SALES 1 2 3 4 5 6 7 8 9 10 11 12 A. Profit & Loss Revenues 1,350 1,390 1,432 1,475 1,519 1,565 1,612 1,660 1,710 1,761 Variable Cost 675 695 716 738 760 783 806 830 855 881 Fixed Cost 450 459 468 478 487 497 507 517 527 538 Profit Before Tax 225 236 248 260 273 286 299 313 328 343 Tax – 30% 68 71 74 78 82 86 90 94 98 103 Profit After Tax 158 165 174 182 191 200 209 219 229 240 B. Cash Flow Profit Before Tax 225 236 248 260 273 286 299 313 328 343 Construction Cost -500 -1,000 Actual Tax Payment -30 -84 0 -17 -31 -44 -54 -64 -72 -80 -87 Net Cash -500 -1.030 141 237 231 229 229 231 236 241 248 256 C. Present Value Present Value Factor .91 .83 .75 .68 .62 .56 .51 .47 .42 .39 .35 .32 Present Value -454.55 -851.24 106 162 143 129 118 108 100 93 87 82 Net Present Value -179.14 Assumptions used: 1. Construction cost at £1.5m, payable £0.5m in September 2007 and £1.0m on completion in September 2008. 2. Fixed costs would be £0.45m p.a. 3. Variable costs would be 50% of sales revenues. 4. General level of price inflation is assumed to be 2% and imputed pm fixed cost 5. Corporate tax is equivalent to 30% , and is applied the year immediately following year incurred 6. Net Present Value factor based on 10% as found in NPV tables 7. Annual tax allowances on capital expenditure are given at the rate of 20% p.a. on the declining balance. All tax effects of the three alternative projects can be assumed to impact actual cashflow exactly one year after the end of the year to which they relate. Annex II SQUARE MOTOR CORPORATION FINANCIAL STATEMENTS AND ASSUMPTIONS (£ ‘ 000) OPTION 2- CONSTRUCT 2ND SHOWROOM AND SERVICE CENTER FOR LUXURY CARS SENSITIVITY ON 10% INCREASE IN FIXED COST 1 2 3 4 5 6 7 8 9 10 11 12 A. Profit & Loss Revenues 1,500 1,545 1,591 1,639 1,688 1,739 1,791 1,845 1,900 1,957 Variable Cost 750 773 796 820 844 869 896 922 950 979 Fixed Cost 495 505 515 525 536 547 557 569 580 592 Profit Before Tax 255 268 281 294 308 323 338 354 370 387 Tax – 30% 77 80 84 88 92 97 101 106 111 116 Profit After Tax 179 187 196 206 216 226 237 248 259 271 B. Cash Flow Profit Before Tax 255 268 281 294 308 323 338 354 370 387 Construction Cost -500 -1,000 Actual Tax Payment -30 -84 -9 -27 -41 -54 -65 -75 -84 -92 -100 Net Cash -500 -1.030 171 258 254 253 254 258 263 270 278 287 C. Present Value Present Value Factor .91 .83 .75 .68 .62 .56 .51 .47 .42 .39 .35 .32 Present Value -454.55 -851.24 128 176 158 143 131 120 112 104 97 92 Net Present Value -44.60 Assumptions used: 1. Construction cost at £1.5m, payable £0.5m in September 2007 and £1.0m on completion in September 2008. 2. Sales of luxury cars estimated at £1.5m, growing in real terms at 3% p.a. 3. Fixed costs would be £0.495 M p.a. 4. Variable costs would be 50% of sales revenues. 5. General level of price inflation is assumed to be 2% and imputed pm fixed cost 6. Corporate tax is equivalent to 30% , and is applied the year immediately following year incurred 7. Net Present Value factor based on 10% as found in NPV tables 8. Annual tax allowances on capital expenditure are given at the rate of 20% p.a. on the declining balance. All tax effects of the three alternative projects can be assumed to impact actual cashflow exactly one year after the end of the year to which they relate. ANNEX III SQUARE MOTOR CORPORATION FINANCIAL STATEMENTS AND ASSUMPTIONS (£ ‘ 000) OPTION 3 – EXPANSION OF SALES AND SERVICE YR 1 2 3 4 5 6 7 8 9 10 11 12 A. Profit & Loss Revenues 1,500 1,545 1,591 1,639 1,688 1,739 1,791 1,845 1,900 1,957 Variable Cost 900 927 955 983 1,013 1,043 1,075 1,107 1,140 1,174 Fixed Cost 300 306 312 318 325 331 338 345 351 359 Profit Before Tax 300 312 324 337 351 364 379 393 409 424 Tax – 30% 90 94 97 101 105 109 114 118 123 127 Profit After Tax 210 218 227 236 245 255 265 275 286 297 B. Cash Flow Profit Before Tax 300 312 324 337 351 364 379 393 409 424 Construction Cost -450 -900 Actual Tax Payment 0 -27 -76 -33 -20 -10 -1 -7 -13 -18 -23 -27 Net Cash -450 -927 224 279 304 328 350 358 366 375 386 398 C. Present Value Present Value Factor .91 .83 .75 .68 .62 .56 .51 .47 .42 .39 .35 .32 Present Value -409 -766 169 190 189 185 180 167 155 145 135 127 Net Present Value 465.49 Assumptions used: 1. Sales estimated at £1.5m, growing in real terms at 3% p.a 2. Construction costs would be 10% lower- £ 1.35 M 3. Fixed costs at £0.3m p.a. 4. Variable costs would be higher at 60% of sales revenues, due to lower margins for mid-size cars 5. General level of price inflation is assumed to be 2% and imputed pm fixed cost 6. Corporate tax is equivalent to 30% , and is applied the year immediately following year incurred 7. Net Present Value factor based on 10% as found in NPV tables 8. Annual tax allowances on capital expenditure are given at the rate of 20% p.a. on the declining balance. All tax effects of the three alternative projects can be assumed to impact actual cashflow exactly one year after the end of the year to which they relate. ANNEX III SQUARE MOTOR CORPORATION FINANCIAL STATEMENTS AND ASSUMPTIONS (£ ‘ 000) OPTION 3 – EXPANSION OF SALES AND SERVICE SENSITIVITY ON 10% DROP IN SALES YR 1 2 3 4 5 6 7 8 9 10 11 12 A. Profit & Loss Revenues 1,350 1,390 1,432 1,475 1,519 1,565 1,612 1,660 1,710 1,761 Variable Cost 810 834 859 885 912 939 967 996 1,026 1,057 Fixed Cost 300 306 312 318 325 331 338 345 351 359 Profit Before Tax 240 250 261 272 283 295 307 320 333 346 Tax – 30% 72 75 78 82 85 88 92 96 100 104 Profit After Tax 168 175 183 190 198 206 215 224 233 242 B. Cash Flow Profit Before Tax 240 250 261 272 283 295 307 320 333 346 Construction Cost -450 -900 Actual Tax Payment 0 -27 -76 -39 -26 -15 -7 -1 -7 -12 -16 -20 Net Cash -450 -927 164 211 235 256 277 294 300 308 316 326 C. Present Value Present Value Factor .91 .83 .75 .68 .62 .56 .51 .47 .42 .39 .35 .32 Present Value -409 -766 124 144 146 145 142 137 127 119 111 104 Net Present Value 123.33 Assumptions used: 1. Sales estimated at £1.35, growing in real terms at 3% p.a 2. Construction costs would be 10% lower- £ 1.35 M 3. Fixed costs at £0.3m p.a. 4. Variable costs would be higher at 60% of sales revenues, due to lower margins for mid-size cars 5. General level of price inflation is assumed to be 2% and imputed pm fixed cost 6. Corporate tax is equivalent to 30% , and is applied the year immediately following year incurred 7. Net Present Value factor based on 10% as found in NPV tables 8. Annual tax allowances on capital expenditure are given at the rate of 20% p.a. on the declining balance. All tax effects of the three alternative projects can be assumed to impact actual cashflow exactly one year after the end of the year to which they relate. ANNEX III SQUARE MOTOR CORPORATION FINANCIAL STATEMENTS AND ASSUMPTIONS (£ ‘ 000) OPTION 3 – EXPANSION OF SALES AND SERVICE SENSITIVITY ON 10% INCREASE IN FIXED COST YR 1 2 3 4 5 6 7 8 9 10 11 12 A. Profit & Loss Revenues 1,500 1,545 1,591 1,639 1,688 1,739 1,791 1,845 1,900 1,957 Variable Cost 900 927 955 983 1,013 1,043 1,075 1,107 1,140 1,174 Fixed Cost 330 337 343 350 357 364 372 379 387 394 Profit Before Tax 270 281 293 305 318 331 345 359 373 388 Tax – 30% 81 84 88 92 95 99 103 108 112 117 Profit After Tax 189 197 205 214 223 232 241 251 261 272 B. Cash Flow Profit Before Tax 270 281 293 305 318 331 345 359 373 388 Construction Cost -450 -900 Actual Tax Payment 0 -27 -76 -36 -23 -12 -3 -4 -10 -15 -20 -23 Net Cash -450 -927 194 245 270 293 315 327 335 344 354 365 C. Present Value Present Value Factor .91 .83 .75 .68 .62 .56 .51 .47 .42 .39 .35 .32 Present Value -409 -766 146 167 168 165 161 153 142 133 124 116 Net Present Value 300.51 Assumptions used: 1. Sales estimated at £1.35, growing in real terms at 3% p.a 2. Construction costs would be 10% lower- £ 1.35 M 3. Fixed costs at £0.330 M p.a. 4. Variable costs would be higher at 60% of sales revenues, due to lower margins for mid-size cars 5. General level of price inflation is assumed to be 2% and imputed pm fixed cost 6. Corporate tax is equivalent to 30% , and is applied the year immediately following year incurred 7. Net Present Value factor based on 10% as found in NPV tables 8. Annual tax allowances on capital expenditure are given at the rate of 20% p.a. on the declining balance. All tax effects of the three alternative projects can be assumed to impact actual cashflow exactly one year after the end of the year to which they relate. Read More