Tesla’s Investment Decisions
Tesla’s Capital Project Model
Tesla intends to invest in a novel assembly production plant that would enhance production by at least 30%. The plant has a life cycle of 10 years and depreciates at the rate of 8%, reducing the balance. The market value of the assembly line is $ 100 million. After the investment in the new plant, cash flows are expected to increase significantly. It is estimated that the project will yield cash flows that vary in each fiscal year.
Tesla’s Modeled Investment rules
- Investments that yield a positive NPV should be accepted.
- Also, when evaluating two projects, the one with the highest NPV should prevail if only the NPV is a positive digit.
- Investments whose IRR exceeds the internal rate of return should be considered.
- Projects whose IRR is less than the opportunity cost of capital should be rejected.
- Only Projects whose cash flows pay back the initial investment within the specified period should be considered.
- Projects with the highest profitability index should be selected.
- IRR on its own should be not be used in making investment decisions regarding mutually exclusive projects since it can be misleading.
The above rules govern investment decisions to ensure that the wealth of shareholders is maximized and that the firm efficiently meets both its short-term and long-term obligations. Also, these rules ensure that the firm only engages in profitable projects to enhance its long-term viability. Before undertaking any project, the NPV, IRR, payback period and profit index of the project should be calculated. A combination of these approaches is used to determine the feasibility of the projects. However, NPV remains the key determinant as projects whose NPV is less than zero are discarded (Gullifer & Payne, 2015). Reason being NPV is accurate since it factors in the time value of money.
Investment Decisions on the Model Project
The viability of the investment will be evaluated using the following techniques: Net Present Value (NPV), internal rate of return (IRR) and Payback Period following the stated rules. Since the net present value was positive, the project should be undertaken. In calculating the present value, the discount rate was estimated at 18%, while the project had a life expectancy of 10 years. The initial cost of investment was $100 million, with cash flows varying throughout the ten years, and the NPV of the project was $137 million. Hence, the project is viable for investment.
The IRR for the project was estimated at 35%. The project should be undertaken, given the IRR exceeds the rate of return. In evaluating the project using the payback period, the initial investment would be recovered in 6 years. Thus, the amount would be recovered before the end of the project’s useful life, making it viable. Thus, considering Tesla’s investment decisions, the project is feasible and would enhance the firm’s profitability, enabling it to attain its long-term goals.
Financing of the Model Capital Project
Tesla relies on two primary approaches to seeking funds for its business: debt and equity. Therefore, Tesla would either issue shares in the capital market to seek finances or acquire debt through the issuance of bonds (Rana & Sage, 2019). Notably, these bonds are convertible, meaning the debt can be converted into ordinary shares for the bondholders upon the fulfillment of the specified conditions. Alternatively; Tesla could issue a combination of both debt and shares in funding the purchase of the new assembly plant.
References
Rana.A & Sage.A. (2019). Tesla ends ‘Spartan diet’ and seeks $2.3 billion to fund expansion. Retrieved from https://www.reuters.com/article/us-tesla-offering/tesla-to-raise-2-billion-from-share-debt-issues-idUSKCN1S80X7
Gullifer, L., & Payne, J. (2015). Corporate finance law: principles and policy. Bloomsbury Publishing.
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Question 
Tesla’s Investment Decisions
You are to complete the Live Case Study at the end of Chapter 5. You will be completing the Live Case Studies for the remainder of the term by researching the company that you have selected. In answering the questions in Live Case Study, you are to answer the questions as laid out in the Framework for Analysis, such as 1,2,3,4,5,…..Also, the sub-sections need to be bulleted. If there is an item that is not applicable, you are to clearly state that. After you have submitted your weekly study, I will grade it and make comments that you need to incorporate into your Case Study.
Researching a particular company will help support your weekly readings. I would suggest that you take a look at Yahoo Finance for information on your researched company. You may also want to go to the company’s website and take a look at Investor Relations, which will give you access to the annual financial statement, SEC filings and the prospectus of the company, along with other information that you will find useful in completing the requirements of the Live Study.
When you are working on your case study, I expect that you will be inserting financial statements and other tables to support your research. These are readily available in Yahoo Finance or the company’s website under Investor Relations, where you will also find financial statements.