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Both projects under consideration involve manufacturing similar models of electric bikes; however the source of raw materials vary significantly between them. The first project involves using locally sourced recycled materials and the second project involves using new raw materials imported from Argentina. To date, the company has spent $550,000 on research and development and the outcome of this has been received well, especially the bikes made with recycled materials which have attracted much attention from the more carbon-conscious Scandinavian market. The company currently employs over 400 people as well as some limited Remotely Operated Vehicles (ROV) equipment for production. It mainly attracts a mix of skilled and unskilled immigrant labour from Mexico to help control production costs. The Finance Director has tasked her team to provide some financial information with respect to these two independent products, and the relevant information is as follows:

Market analysis costs incurred to date are $230,000 and this spend has been assumed to be equally spread across the two products. Core findings from this market analysis concluded that there are some comparable products in the mainstream market however there is no established dominant supplier. Additionally, the environmental and health benefits of electric bikes are gaining significant media attention. The worldwide focus on reducing the numbers of cars on the road had added to the contemporary interest in  alternative methods of transport.

Other key financial information:

• Direct variable product costs grow in proportion with sales.

• The maximum capital expenditure budget available to spend is $13million and the weighted average cost of capital (WACC) is 15%. The projects are not divisible.

• Marketing & administrative expenses are expected to remain the same each year.

• The company's depreciation policy is to depreciate investment costs over the economic life of the investment (5 years) using the straight-line method.

• The company’s threshold for the payback period is 3.5 years.

• The team have also notified the finance director of the important of managing the working capital. They have identified delays in payments from some key customers however Cycle-Power Ltd continue to pay their suppliers on time or  slightly earlier than the invoice due date.

Prepare an executive report for the board of directors of Cycle-Power Ltd evaluating the investment decision and recommending which project(s) the company should undertake. Please ignore taxation.

1. Financial analysis, and interpretation, including:

• Identification and explanation of the irrelevant costs associated with the decision.

• Forecasted annual (and total) net cash flows and profits for the next 5 years.

• Appropriate cost-volume-profit (CVP) analysis identifying the break-even point and the margin of safety.

• Appropriate capital investment appraisal analysis, including: Payback Period (PP), Net Present Value (NPV) and Internal Rate of Return (IRR).

• Appropriate NPV sensitivity analyses using the “Zero- NPV” technique and employing at least three different assumptions.

2. Critical discussion and evaluation of the strengths and weaknesses of the different financial techniques required in section 1. Reference to the specific case study  and relevant academic studies is required.

3. Critical discussion and recommendation on how Cycle-Power Ltd could improve their working capital management.

4. Critically discuss key non-financial factors that may impact this investment decision using PESTLE analysis.

5. Presentation and executive summary.