Kabura - kjjkjk PDF

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Mazda is considering building a new model of sports car called the Kabura. Initially, Mazda will sell the Kabura to its dealers for $20,000. However, as the novelty wears off, the price will fall to $19,000 at the beginning of the second year, and to $18,000 at the beginning of the fourth year. At the end of the fifth year, production will be halted. Based on marketing research, which cost $3.2 million to complete, the number of units projected to be sold each year is shown in Table 1 below. For Mazda to begin production, it must invest $300 million to retool a factory in Evansville, Indiana. (Note that this factory is currently sitting vacant, and could be leased to another manufacturer for $120 million per year if the Kabura is not built there.) The $300 million investment will be depreciated on a seven-year MACRS schedule, and be sold at a salvage value of $59 million at the end of the project. Annual fixed operating costs are expected to be $60 million, while the variable costs should be around $12,000 per car. The company would increase its net working capital by $8 million at the beginning of the project, and net working capital would adjust to a level equal to 5% of sales each year. To fund this project, Mazda will issue debt requiring annual interest payments of $4 million. Mazda currently has a capital structure with a balance of 20% debt and 80% equity. Its cost of capital will not change if Mazda goes forward with the Kabura project or leases the factory. The after-tax cost of its debt is currently 10%, while the beta of Mazda’s common stock is 2.3. The risk-free rate is 4.6%, and the market risk premium is 6.7%. Mazda’s tax rate is 20%. Should Mazda build the Kabura?...