General Battery Company (GBC) is formulating plans to open Battery Exchange Centers throughout the U.S. where All-Electric car owners can exchange batteries in one minute.
GBC has developed and tested a few prototype centers in the past year at a total cost of $10,000,000. They now are seeking investors to open these throughout the U.S. over the next few years by selling franchises. This project is to prepare a proposal for one of these centers that can be presented to perspective investors. The proposal will be a five year plan to encourage readers to invest in a franchise.
Capital Investment will be initially needed for each center as follows:
Batteries: 100 * $5,000 each
Chargers: 25 at $2500 each
Transfer machines: 5 at $75,000 each
Installation: $200,000
Depreciation on the capital investment is five year MACRS. —
Each recharging facility is expected to generate revenue of $3,000,000 annually in the first year. This revenue per center is expected to grow by the following percentages each year.
Year |
0 |
1 |
2 |
3 |
4 |
5 |
Revenue |
|
$3,000,000 |
||||
Revenue growth % |
|
|
10% |
25% |
30% |
20% |
Variable costs including utilities, labor and material costs, but excluding batteries, is estimated at 70% of the revenue.
The Land and building for each center will be leased at an annual cost of $100,000 annually.
Local administrative expense for each center is estimated at $150,000 annually.
Local Marketing is planned at $36,000 annually.
Starting in year 2, batteries and equipment will have to be refurbished at a cost of $100,000 per year.
GBC will assess each local center for its nation-wide activities. This includes such things as Corporate Administration, product research, national marketing, relationships with automakers, etc. This corporate assessment is $250,000 annually that should a line item in the S.G.&A. of each center.
Working capital of $500,000 is needed for Inventory, Accounts Payable, and Accounts Receivable. It will be increased to $500,000 in year 0, maintained at that level for years 1 through 4, and returned to zero at the end of year 5.
The value of each center if sold at the end of five years is forecasted to be $1,000,000. Consider this as the salvage value in year 5.
All tax rates are 35%
The prime evaluation measure is the internal rate of return.
Part 1
Prepare a five-year Income Statements and Cash Flow Analysis
Part 2
Prepare alternative scenarios that help potential investors understand the financial opportunities that the situation offers.