Advanced Corporate

Finance
Case Study 1
The duel between Mercedes and Tesla

Presented by:
Mithilesh Waghmare 2015B45
Vishwas Dwivedi 2015B

Key
Assumptions
:

Construction
Costs:Introductory
Costs

USD 10 Billion already spent on research, on the

automotive technology and development of the
commercial design. None of that money can be recouped
at this stage, if it decides not to go ahead with the Electric
Car.
Mercedez will have to spend $30 billion up front (right now)
to lock in suppliers, distributors and retailers and to invest
in infrastructure. The cost is depreciable over the next 12
years, down to a salvage value of $ 5 billion, and Mercedes
expects to use higher of straight-line and double declining
depreciation.

Market
Potential and
Share

In the premium auto market, there were 5 million

automobiles sold globally in the most recent year and the
market is expected to grow approximately 4% a year for
the next decade.

R&D
Expenses

1.50
%

Inflation Rate

Market Potential and Share

Price and Unit Costs

Selling Price of the Cars
Cost of the Car
Marketing Options and Costs
1. Electric Cars through Auto Retailersand
gain a commission on per unit sold
2. Electric Cars are being sold through the
Mercedz Cars stores
Year
Cost of Selling the Mercedez car through the
Mercedez Car store
Depreciation on the Project
Commission to sales people
80% of the Revenues through Speciality
Retailers
20% from Mercedez Electric Car stores

Geographical breakdown

Advanced Corporate Finance Case Study 1

0
3%

1
5%

2
7%

3
9%

0
9000
0
6800
0

69020

2
9272
0.25
7005
5.3

3
94111.
05375
71106.
1295

15

13.5
1.5

12
1.5

10.5
1.5

91350

10%
15

5%
0.8
0.2
Mercedes expects to get its revenues
from the Electric Car globally, with the

Page 1

same breakdown for revenues as that

of Daimler showed in Exhibit
1. Mercedes expects this revenue
Production Facilities and Costs

Current Capacity usage of Germany

Expectations of an Increase in the same
If Mercedez goes ahead with the Electric Car
Cost of building a new facility

40%
9.50
%
10% of the
total capacity
15 billion to be ammortized
over 20 years

General and Administration Expenses

General and Adminsitrative Cost

Allocation of 10% of its existing G& A Cost to
the new division
Growth rate of General and Administrative
Cost
Extra cost next year for the New Electric Car
division

10
billio
n
10%
5%
0.5
billio
n

Advertising Expenses

Current Expenditure on Advertising Expenses

1. If it does not invest in the Electric Car
increment in the cost
2. If it does invest in the Electric Car the
increment in the cost

8
billio
n
5%
10%

Working Capital
Accounts Receivables as a % of the Variable
Production Cost

5%
Input Costs as a % of the Variable Production Cost
((not including
depreciation, marketing costs, allocations or
advertising expenses).
Material
Finished Electric Cars
10%
Accounts Payables as a % of the Variable
Production Cost (this does not include
depreciation, marketing costs, allocations or
advertising expenses

NOTES

Advanced Corporate Finance Case Study 1

Page 2

6%

All of these working capital investments will have to

be made at the beginning
of each year in which goods are sold. Thus, the
working capital investment for
the first year will have to be made at the beginning of
the first year.
Debt Choices

Mercedes expects to finance the Electric Car division

using the same
mix of debt and equity (in market value terms) as it is
done by Daimler currently in
the rest of its business. Daimlers book value of debt,
interest expenses and operating
leases can be found in the Exhibits. The average
maturity is of 6 years. Daimler was
rated A- and the default spread for companies with
that rating is 1.75%.
Book value of debt, interest expenses and operating
leases in Exhibits need to be adjusted
6
Average Maturity
years
Daimler was
rated A- and the default spread for companies
with that rating is 1.75%.
Macro data: The current long-term US
Treasury bond rate is 1.55%, and the
expected inflation rate is 1.5% and the
mature market risk premium is: 4.92%
Levered Beta for Daimler is 2.5 while the levered beta
of the Global Auto Industry with a sample size of 125
companies is 1.25 having average Equity/Capital
Ratio of
55%.

Advanced Corporate Finance Case Study 1

Page 3

Decision: Not to Invest because the NPV is negative and IRR is -7.20%
Cost of Capital:
Computation of Cost of Equity using the
CAPM Model
Levered Beta of the Global Auto Industry with a
sample size of 125 companies
Average Debt to Equity Ratio(Industry)
Average Tax Rate
Unlevered beta of the industry

Average Debt to Equity Ratio of the Company

Average Tax Rate
Levered Beta of the Company(calculated)

1.550
973
0.297
2
1.490
621

0.088
839
0.030
357
0.144
998

Cost of Equity
After-tax Cost of Debt
WACC Computation

Return on Capital
The average ROC is 4.3%

Advanced Corporate Finance Case Study 1

1.25
0.818
182
0.080
1 As per Damodaran
0.713
208

Page 4

Risk Free Rate

Mature market Risk
Premium
Expected Inflation
Rate
Levered beta of the
company
Default Spread
according to rating

1.5
5%
4.9
2%
1.5
0%
2.5
1.7
5%

NPV 12 Year Life = -18977953294

1. Accounting Return Analysis

Estimate the operating income from the proposed Electric Car investment to Mercedes
over the next 12 years. Estimate the after-tax return on capital for the investment over
the 12-year period (From year 1 to year 12).
You would require to make assumptions about allocation and expensing. Be reasonable
and explicit about your assumptions and estimate the ROC would you accept or reject
this project based on these parameters?

Year
Auto
Retailer
s
(revenu
e)
Electric
car
stores
(revenu
e)
Invest
ment in
EC
stores
Depreci
ation in
EC
invest
Depreci
ation of
introdu
ctory
costs
R&D
Expens
e
Commi
ssion
Expens
e
Adverti
sing
expens
e on EC
Allocat
ed G&A
Expens
e
Direct
Expens
e (G&A)
Product
ion
costs
Operati
ng
Income
(EBIT)
Tax
Operati
ng
Income
after
tax

ROC

10

11

12

1123
2000
000

1976
0832
000

2920
3347
963

3963
4783
855

5113
5917
357

5397
9074
362

5698
0310
897

6014
8416
182

6349
2668
122

6702
2860
470

7074
9331
512

7468
2994
344

2808
0000
00

4940
2080
00

7300
8369
91

9908
6959
64

1278
3979
339

1349
4768
591

1424
5077
724

1503
7104
046

1587
3167
031

1675
5715
117

1768
7332
878

1867
0748
586

150000
00000

300000
0000

15000
00000

15000
00000

15000
00000

15000
00000

15000
00000

15000
00000

15000
00000

15000
00000

15000
00000

15000
00000

300000
00000

41666
66667

34722
22222

28935
18519

24112
65432

20093
87860

16744
89883

13954
08236

13954
08236

13954
08236

13954
08236

13954
08236

13954
08236

12636
00000

22230
93600

32853
76646

44589
13184

57527
90703

60726
45866

64102
84976

67666
96821

71429
25164

75400
71803

79592
99795

84018
36864

84000
0000

88200
0000

92610
0000

97240
5000

10210
25250

10720
76513

11256
80338

11819
64355

12410
62573

13031
15701

13682
71486

14366
85061

10500
00000

11025
00000

11576
25000

12155
06250

12762
81563

13400
95641

14071
00423

14774
55444

15513
28216

16288
94627

17103
39358

17958
56326

50000
0000

87966
6667

13000
06587

17643
68939

22763
49597

24029
14635

25365
16689

26775
47017

28264
18631

29835
67507

31494
53860

33245
63495

330000
00000

10608
00000
0
58882
66667

18663
00800
0
40214
50489

27580
93974
3
21393
81540

37432
85141
9
21183
0405

48295
03305
9
17890
28664

50980
23689
8
24313
83518

53814
73806
9
30356
59890

56806
83750
6
33796
10850

59965
29767
1
37433
94662

63299
36822
1
41281
49492

66818
81309
5
60350
78559

70533
93910
3
64654
53846

30%

30%

30%

30%

30%

30%

30%

30%

30%

30%

30%

30%

30%

330000
00000

58882
66667

40214
50489

21393
81540

21183
0405

12573
29345

17087
76336

21334
61771

23751
90506

26308
57769

29012
63463

42414
53212

45439
20963

14.6

11.1

-6.5%

-0.7%

4.5%

4.3%

6.0%

7.5%

9.4%

11.9
%

19.0
%

22.2
%

100000
00000.0
0
0

Advanced Corporate Finance Case Study 1

Page 5

%
Averag
e ROC

4.3%

Yes we are assuming that there is a need to increase the capacity at the end of 8 th year,
so we are allocating and expensing from the end of 8 th year.
Capacity

100%

100%

100%

100%

100%

100%

100%

Used Capacity for Luxury

Cars
cpaacity Used for Electric
Car
Remaining Capacity

40%

43.8%

48.0%

52.5%

57.5%

63.0%

69.0%

0%

10.0%

10.0%

10.0%

10.0%

10.0%

10.0%

60%

46%

42%

37%

32%

27%

21%

And since WACC is greater than ROC, that is the cost of capital is greater than the return
on capital, so we should reject the project on these parameters.

2. Cash Flow Analysis Estimate the after-tax incremental cash flows from the proposed
investment over the next 12 years.
If the project is terminated at the end of the 12th year, and both working capital and
investment in other assets can be sold for book value at the end of that year, estimate
the net present value of this project. Develop a net present value profile and estimate the
internal rate of return for this project.
If the Electric Car division is expected to have a life much longer than 12 years, estimate
the net present value of this project, making reasonable assumptions about investments
needed and cash flows over the life of the project. Develop a net present value profile
and estimate the internal rate of return for this project.

Incremental
cash flow
Year
After tax
operating
income
Depreciatio
n
Capital
expenditure
Change in
WC

CF
Sunk costs
Non
incremental
allocated
expenses
Incremental
cash flow

0
0
55000
00000
0
0
55000
00000
0
10000
00000
0

0
45000

1
5888
2666
67
5666
6666
67

10

11

12

40214
50489

21393
81540

21183
0405

12573
29345

17087
76336

21334
61771

23751
90506

26308
57769

29012
63463

42414
53212

45439
20963

49722
22222

43935
18519

39112
65432

35093
87860

31744
89883

28954
08236

28954
08236

28954
08236

28954
08236

13954
08236

13954
08236

0
1126
3200
00
1347
9200
00

85525
2320

0
94687
4517.
4

10460
41210

11533
08109

0
28510
5466.
3

0
30095
7330.
3

0
31769
0557.
8

0
33535
4152.
8

0
35399
9843.
7

0
37368
2235.
1

0
39445
8967.
3

95519
413

13072
62461

26533
93817

36134
09096

45981
60753

47279
12677

49529
08184

51909
11852

54426
71855

52631
79213

55448
70232

13930
66733
14885
86146

17272
23479
30344
85940

20942
56283
47476
50099

24967
89179
61101
98274

26305
87622
72287
48375

27715
74106
74994
86782

29201
35729
78730
43913

30766
80484
82675
92335

32416
38387
86843
10242

34154
62674
86786
41886

35986
31050
91435
01281

1089
3400
00
2585

Advanced Corporate Finance Case Study 1

Page 6

Discount
rate

PV
NPV( 12
years)

00000
0.00

8000
0.00

1.00
45000
00000
0.00
18977
95329
4

1.14
2258
3436
9.74

.67

.11

.88

.99

.09

.61

.09

.91

.71

.38

.76

1.31

1.50

1.72

1.97

2.25

2.58

2.95

3.38

3.87

4.43

5.08

11354
39991
.57

20214
84659
.49

27622
25506
.55

31047
80035
.92

32079
95485
.12

29066
80462
.79

26650
38749
.74

24441
90293
.37

22422
62211
.33

19570
32070
.90

18007
51609
.07

Since the NPV is negative, so we reject the project.

3. Sensitivity Analysis
You need to run sensitivity analysis based on three parameters i.e. for a given change in
parameter, what is the change in the end result. (One way to do so in use Excel and run
Data Tables or alternatively you can also change the parameters manually and see the
effect).
Please include the sensitivity analysis in your report Based upon your analysis, and any
other considerations you might have, tell me whether you would accept this project or
reject it. Explain, briefly, your decision.

TaxRate

-18977953294

27%

28%

29%

29.72%

30%

31%

-19213351927

-19127131129

-19040535429

-18977953294

-18953562881

-18866211526

13%

14%

14.50%

15%

16%

17%

-16428030614

-18162192974

-18977953294

-19762280913

-21240480494

-22607729030

WACC

-18977953294

We have performed the sensitivity analysis and tried to determine the impact on NPV of
different Tax Rates and various WACCs.

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