Research and development (R&D)

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Problem:
A large auto company has just completed the research and development (R&D) on a new product, the Electrobicycle. The Electrobicycle is an electronic, climate-controlled bicycle with zero emissions. The R&D efforts focused on developing the capability to utilize electricity to power bicycles. Ultimately, the auto company expects Electrobicycles to be popular for most urban citizens due to convenience and low cost.
The R&D, which cost $3 million, is complete and paid for. The plant and equipment to mass produce the Electrobicycles will cost $2 million. This plant and equipment will be depreciated over 5 years using the straight-line method to zero book value ($400,000 per year). A working capital investment of $1 million will be needed at the beginning of the project. A working capital investment of $200,000 per year will be needed thereafter.
At the end of 5 years, the auto company believes there will be no more sales opportunities for Electrobicycles and will cease all production. Thus, at the end of the project, all working capital investments (the $1 million initial investment and the $200,000 per year) will be recovered at full value. The plant and equipment will be scrapped for a salvage value of $300,000 (after tax).
The company expects moderate sales in years 1 and 2, and then significant growth in each year thereafter as consumers adopt the Electrobicycles. Revenues and earnings will cease at the end of Year 5. The revenues, after-tax earnings, and cash flow for the 5-year life of the project are shown in this table.

Table 1
Projected Electrobicycle Financial Projection
Numbers in $000’s
Today Year 1 Year 2 Year 3 Year 4 Year 5
Revenues $1,000 $1,500 $3,000 $6,000 $12,000
After-tax earnings ($500) $100 $300 $600 $1,200
Project Cash Flow
After-tax earnings ($500) $100 $300 $600 $1,200
Plus: Depreciation $400 $400 $400 $400 $400
Less: Cost of plant, equipment ($2,000) $0 $0 $0 $0 $0
Less: Working capital ($1,000) ($200) ($200) ($200) ($200) ($200)
Plus: Recovery of working capital n/a n/a n/a n/a $2,000
Plus: Salvage value n/a n/a n/a n/a $600
Annual project cash flow ($300) $300 $500 $800 $4,000
Note: n/a = not applicable

Calculate:
● Determine the NPV for the Electrobicycle project. Use the annual project cash flow from the table above. For the required rate of return, use the percent value from your birthday date. For example, if your birthday falls on the 16th of the month, the required rate of return would be 16%.
○ For guidance, review Section 7.1 of the textbook, NPV Example: The Pizza Scooter Delivery Project Revisited.
Write:
In your post, include the following:
● Calculate the NPV of the Electrobicycle project. Be sure to show your NPV calculations.
● Explain, in your own words, why working capital investments are subtracted each year in the cash flows.
● Explain, in your own words, the meaning of the required rate of return for the project.
● Assume the auto company has a required rate of return of 15%. Based on the required rate of return you used for the Electrobicycles (based on your birthday date), is the Electrobicycle project more or less risky than the auto company? Explain your answer.
● Based on your concluded NPV, should the company invest in this project to build Electrobicycles? Justify your answer.

Sample Solution

The environment also suffers as a result of the sand mining. Marine sand mines are only increasing and these are having large consequences on the marine life in the surrounding area. The sand is mined from the benthic zone and this mining destroys habitats for aquatic organisms and alters the biodiversity of an area, Desperez et al. claim that sand mining always causes a net loss in faunal biomass in the surrounding ecosystem. The study undertaken by Boyd et al. lends credence to this point and adds that it in the long-term the ecosystem can only be restored to its original state if the original sediment composition is restored. Both studies fundamentally agree with each other and the overall consensus.

A study undertaken by Ashfran et al. into the effects of sand mining discussed that when aggregates are mined but are too fine they are dumped into waterways in large batches. These large plumes alter the turbidity of the water and thus can transform riparian and aquatic habitat to such an extent that they no longer are suitable for some organisms that inhabit them.

As well as being out at sea, many sand mines are situated on rivers. Mining on the bed of a river causes the river to undergo channel incision upstream and downstream of the mine. This can cause lateral instability of the river banks and can cause the draining of the alluvial aquifer to a lower level thus reducing the storage capacity of the aquifer. This decreased level of the water table has a great impact on the effect of droughts in the surrounding area, increasing their severity and occurrence. This research was published in 1997 and therefore is arguably not up to date however it is supported by more recent studies for example the study of Poyang lake by Leeuw et al. in 2009 states that this adverse environmental impact has occurred on Poyang lake.

The mining of sand has both a direct and indirect effect on the climate by exacerbating global warming and climate change through the emission of carbon dioxide. Due to containerisation and globalisation sand can be easily transported over long distances to the location where it is actually used. This transport often involves the combustion of fossil fuels and the emission of CO2 thus enhancing the greenhouse effect. It also has an indirect effect on the climate, because as previously discussed the mining of sand is often with the aim of concrete production, cement is also needed for concrete production. Around 0.9 tonnes of carbon are produced for every tonne of cement produced. This also enhances the greenhouse effect thus leading to anthropogenic climate change. This is a long-term global effect and therefore lends credence to the argument that the impacts of the over-exploitation are not just localised.

Poyang Lake

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