You are the CFO of Ford Motor Company (the company) considering taking on a project that requires $10 million in preliminary funding (in other words, the project will require $10 million in costs before it becomes profitable.
This project would be designed to develop a new fuel saving device (not a new engine) that could be added to all models of passenger vehicles sold by Ford Motor Company. The new fuel savings device would add $2500.00 to each vehicle sold by Ford Motor Company (passenger vehicles). It is assumed that 90% of the passenger vehicles sold would be sold with this devise. The expected fuel savings (in dollars) for each passenger vehicle owner (based on an average of $5.00/gal) would be 15% per year.
Research the Internet to find out information on Ford Motor Company’s balance sheet, income statement, statement of retained earnings and statement of cash flows for the most current year reported.
There are several specific questions that must be addressed in this research paper before a decision on moving ahead with this project is made. Based on your research of the most recent financial statements for this company and the financial markets address the following issues:
Determine the current rate of return on risk-free assets.
Determine beta for Ford Motor Company from an internet financial site such as Yahoo-Financial.(Do they need to estimate beta or can they just get it from Yahoo-Finance).
Determine the required return on market
Determine an appropriate interest rate for loans of this amount of capital for a well-established company like Ford Motor Company.
Determine the internal rate of return for Ford Motor Company using the financial tools at the website below: http://www.datadynamica.com/IRR.asp
After you calculate or identify the items listed above you will need to address the following issues:
Should the company undertake this project? Justify your opinion.
In principle, undertaking a project involves making financial decisions that could make or break the project.
How do you plan to finance the project?
There are plenty of financing options, including: common stock, preferred stock, debt (many debt options), bank loans, and internal cash. What will be your recommendations on this issue?
What is the cost of each of these options?
Is there one financing mix that is better than the rest? Explain your rationale. Support your work with research and calculations.