Executive summary of Atoyo Limited Hybrid Car Project

As there are increasing concerns on global warming and the increasing price of the petrol and electricity, it seems that it would be a good opportunity for Atoyo Limited to introduce the new hybrid car aiming for a profitable return. However, the large cost of the initial investment, the downsize of the existing product Spirit and the high electricity and marketing cost have proved that it is not a good investment.

A detailed analysis has been performed on the project using the techniques such as Net Present Value (NPV) and Internal Rate of Return (IRR) based on the projected incremental sales and costs. The result reveals that the project has a negative NPV (-$3,122,138) and this is a clear indication that this Hybrid Car Project should be rejected.

We think that the following reasons highly contribute to a negative NPV. Firstly, even though the company can use existing equipment for the new car production, a new specialised machinery is needed. This involves extensive cost at front ($10,000,000), which far exceeds the process on sales of the old machine ($350,000). Furthermore, the electricity costs and marketing costs are high throughout the life of the project, while the savings on the material costs are much less. The total of electricity and marketing costs in response to the total sales is 30% in year 1 and 11.8% in year 10, which indicates that the proportion for these 2 costs are really high in the early years of the projects life. Thirdly, the lost on sales of Spirit is considered very high relative to the increased sales from the Hybrid Car project (62.5% in year 1 and gradually decreasing to 36% in year 10). Fourthly, there are requirements for a higher level of net working capital (15% of the following years increased sales) and this leads to a substantial amount of cash outflow each year. Although the depreciation tax shield under the taxation law is calculated using 10 years period instead of 15 years of accounting treatment, and we can recover 30% of the cost of the new machine in year 10, these cash inflows are still not able to cover for the outflows. In addition to the NPV calculation, the IRR is negative (-4.95%), which further indicates that the Hybrid Car Project should not be executed.

The following table entails all the details of the calculations of NPV for the Hybrid Car Project. Table 1. Cash flows at the beginning, during the life, and at the end of the Hybrid Car Project.

Year 0 Year 1 Cash flow at the beginning 10,465,000 Cash flow during the life -6,200 Cash flow at the end NPV at 7.5% -3,122,138

Year 2

Year 3

Year 4

Year 5-9

Year 10

671,300 752,675 978,119 1,086,881 1,782,813 2,620,931

In conclusion, it can be deduced that if there is any other significant strategic benefits for Atoyo Limited to proceed with the Hybrid Car Project, such as competing for large market shares or increasing company reputation. However, from a financial point of view, as both NPV and IRR are negative, Atoyo Limited should not invest in the Hybrid Car Project.