Question
Solar Uninterruptible Nanoparticle (SUN) installs solar panels. SUN is evaluating a proposal that they lease the solar panels to customers as opposed to selling them.
The average annual maintenance cost for each installation is $150. The administrative costs for SUN are a fixed $250,000 annually. SUN purchases the panels from a manufacturer for $2,500 as needed. A forecast is that they could lease 10,000 installations in year 1 at a price of $1244 annually ($100 month compounded at 8% APR). After year 1, installations are expected to grow 20% annually. The planning horizon is 5 years.
Working capital requirements are for inventory only as each leased installation is considered as being in SUN's inventory. The inventory value of each solar installation is its purchase cost.
Although SUN will treat the solar panels as inventory rather than an investment in their financial statements, they would own the leased panels and therefore can depreciate these. They will do this using straight line depreciation over 5 years based on the cost of the unit and the total number of units they have installed . There is no salvage value for the solar panels.
SUN will borrow the funds for the investment in solar panels at a rate of 8%, which is used as the MARR. The tax rate for SUN is 14%.
The Income and cash flow statements are shown below. It is not your assignment to critique the Income and Cash flow statements as the CEO has developed and approved these. Your tasks are the following.
a How many customers will be needed in Year 0 to break even, measured by the present worth = 0, if the lease price per unit is $1,245?
b What leasing price would have to be charged to achieve a present worth of $1 million at a quantity of 10,000 customers for the first year?
| Data Block |
|
|
|
|
|
|
Annual Lease Price |
$1,245 |
each |
|
|
|
|
Year 1 quantity |
10,000 |
|
|
|
|
|
Annual % increase |
20% |
|
|
|
|
|
Cost for each installation |
$2,500 |
|
|
|
|
|
Maintenance Costs |
$150 |
annual |
|
|
|
|
Fixed Costs |
$800,000 |
annually |
|
|
|
|
MARR |
8% |
|
|
|
|
|
Tax Rate |
14% |
|
|
|
|
|
Time span |
5 |
|
|
|
|
|
Salvage |
$0 |
|
|
|
|
|
|
1 |
2 |
3 |
4 |
5 |
|
Quantity |
10,000 |
12,000 |
14,400 |
17,280 |
20,736 |
|
Total Units Installed |
$10,000 |
$22,000 |
$36,400 |
$53,680 |
$74,416 |
|
Lease Price each |
$1,245 |
$1,245 |
$1,245 |
$1,245 |
$1,245 |
|
Revenue |
$12,450,000 |
$27,390,000 |
$45,318,000 |
$66,831,600 |
$92,647,920 |
|
Inventory Value each |
$2,500 |
$2,500 |
$2,500 |
$2,500 |
$2,500 |
|
Total Inventory Value |
$25,000,000 |
$55,000,000 |
$91,000,000 |
$134,200,000 |
$186,040,000 |
|
Depreciation (SL over 5 years) |
$5,000,000 |
$11,000,000 |
$18,200,000 |
$26,840,000 |
$37,208,000 |
| Income Statement |
|
|
|
|
|
|
|
1 |
2 |
3 |
4 |
5 |
|
Revenue |
$12,450,000 |
$27,390,000 |
$45,318,000 |
$66,831,600 |
$92,647,920 |
|
COGS |
($1,500,000) |
($3,300,000) |
($5,460,000) |
($8,052,000) |
($11,162,400) |
|
Gross Profit |
$10,950,000 |
$24,090,000 |
$39,858,000 |
$58,779,600 |
$81,485,520 |
|
Fixed Costs |
($800,000) |
($800,000) |
($800,000) |
($800,000) |
($800,000) |
|
Depreciation |
($5,000,000) |
($11,000,000) |
($18,200,000) |
($26,840,000) |
($37,208,000) |
|
EBIT |
$5,150,000 |
$12,290,000 |
$20,858,000 |
$31,139,600 |
$43,477,520 |
|
Taxes |
($412,000) |
($983,200) |
($1,668,640) |
($2,491,168) |
($3,478,202) |
|
Net Income |
$4,738,000 |
$11,306,800 |
$19,189,360 |
$28,648,432 |
$39,999,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash Flow |
|
|
|
|
|
|
|
1 |
2 |
3 |
4 |
5 |
|
Net Income |
$4,738,000 |
$11,306,800 |
$19,189,360 |
$28,648,432 |
$39,999,318 |
|
Depreciation |
$5,000,000 |
$11,000,000 |
$18,200,000 |
$26,840,000 |
$37,208,000 |
|
Working Capital (Inventory) Change |
($25,000,000) |
($30,000,000) |
($36,000,000) |
($43,200,000) |
($51,840,000) |
|
Cash Flow |
($15,262,000) |
($7,693,200) |
$1,389,360 |
$12,288,432 |
$25,367,318 |
|
|
' |
|
|
|
|
|
Present worth |
$6,672,693 |
|
|
|
|