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Fast forward to the year 2028. Humankind has made huge progress in the field of artificial intelligence.
Fast forward to the year 2028. Humankind has made huge progress in the field of artificial intelligence. In particular, autonomous self-driving vehicle technology has matured and has proven to be safe. Singapore, one of the first few cities to test-bed the technology, has been keeping pace.
Lion City Autonomous Taxi (LCAT) Company has just won a Government tender to provide the first autonomous taxi service in Singapore. Its CEO, Mr Alan Mas, is visibly excited. Successes in this small city state can easily be replicated in the other regional cities in South East Asia. It has the first-mover advantage!
Under the terms of the tender, LCAT has to put at least 400 taxis on the road. And these must comprise a basket of 3 car models from Tesla, a smart electric vehicle manufacturer. Specifically, Tesla Models A, B and C costing $150,000, $180,000 and $250,000 each respectively are required. At least 20% of the total fleet size must be Model C cars. A minimum of 30% must be Model B. The rest can be the cheaper Model A. This is to ensure that there is some variety of services that will cater to the needs of the commuting public. In tendering for the project, LCAT has set aside a maximum budget of $80 million to invest in the fleet of Tesla autonomous taxis.
The initial investment in buying the autonomous vehicles is only a start. LCAT expects to incur another 40% of the investment costs over a period of 10 years to operate and maintain its autonomous fleet. This period of 10 years also happens to be the statutory life-span of a vehicle in Singapore. LCAT is prepared to write-off the full value of its fleet at the end of this period. For investment purposes, the company uses a return rate (ROI) of 5% per annum.
LCAT expects this to be a profitable business. It surmises that there will be a preference for autonomous services versus regular taxi services. Firstly, computer-controlled rides have proven to be safer. Secondly, its market research has shown that many taxi customers prefer a quiet ride rather than to have to bear with talkative taxi drivers!
Alan Mas has good reasons to cheer. To him, life is about the future. And the future is here today.
Question 2
This question requires you to demonstrate how to work with changes in the value of money over time. Assuming a minimum fleet size of 400 taxis, use a NPV model to analyse the profitability of this business. You may assume that operating expenses is 40% of the initial investment in year 1 and will increase by 5% every year over the next 9 years. Annual revenue is also expected to increase by 10% each year over the same period. Your model must clearly distinguish between the different types of variables used.
(a) Using your model and the Goal Seek feature of Excel, determine the minimum annual revenue required in year 1 in order to meet LCAT's investment objectives.
(b) How will an annual inflation rate of 3% affect LCAT's investment goals? Justify your answer.
(40 marks)
Please help me out with question 2. Thanks !
