Submitted by:
Ms. Angel Ruzel Resureccion
Ms.Janine Mariz Famoso
Ms. Jhucyl Diaz
Submitted to:
Mr. Michael Baylosis, PhD
January 7, 2025
1. What is your qualitative assessment of Liz’s currents and prospective business? Was Liz well
positioned for success?
Qualitative Assessment
Liz Motor Corp. stands out in the EV market as an innovative and agile company, capturing the
attention of environmentally-conscious consumers with a diverse range of vehicles. Its early adoption of
advanced technologies, like solid-state batteries, sets it apart from competitors, positioning Liz as a leader
in sustainability and cutting-edge innovation. Unlike traditional automakers, Liz's exclusive focus on EVs
allows it to quickly adapt to changing market conditions, while in-house battery production gives it control
over its supply chain and cost structure. Additionally, the company is committed to global sustainability
trends and is actively working to expand its presence with ambitious plans to launch 20 new EV models by
2027, backed by significant financial investment. This focus on environmental, social, and governance
(ESG) initiatives strengthens its brand appeal among eco-conscious consumers and investors alike.
However, Liz faces challenges as competition in the EV market intensifies. While its growth has
been impressive, its sales growth slowed from 26% in 2021 to 17% in 2022, with well-established
competitors like Tesla and legacy automakers increasing their EV offerings. Liz’s heavy reliance on EVs and
its focus on high-risk technologies, such as solid-state batteries, leaves it vulnerable to market disruptions
and financial strain. Furthermore, its limited global presence and the unproven nature of some of its
innovations pose risks to rapid expansion. Despite these challenges, Liz has opportunities to leverage its
first-mover advantage in solid-state batteries, enhance its ESG reputation, and expand into new markets,
especially as governments increase incentives for EV adoption. However, economic uncertainty, emerging
technologies, and regulatory risks could impact its ability to execute on these opportunities.
Is Liz Well Positioned for Success?
Liz Motor Corp. is well-positioned for success in the short to medium term, thanks to its agile
structure, innovative approach, and strong focus on sustainability. However, there are still significant
challenges ahead. To remain competitive and secure its long-term future, Liz will need to carefully manage
its finances, perhaps by phasing investments and seeking strategic partnerships to share costs. Expanding
its global market presence and strengthening its brand will also be crucial, alongside addressing
technology and operational risks. This can be achieved by investing in solid research and development
and staying flexible to quickly adapt to changing market conditions.
2. Why Anthony considering this ESG project? What criteria should she use for evaluation?
Annie Anthony, CFO of Liz Motor Corp., saw the solid-state battery ESG project as a crucial step
toward addressing some of the company’s key challenges and securing long-term success. Liz had recently
experienced a 6.2% drop in stock price due to a hit to its ESG reputation, and the board made it clear that
improving ESG performance was a top priority. The solid-state battery project offered a way to reduce the
carbon footprint of EV batteries by 39%, helping to rebuild Liz’s reputation with investors and stakeholders.
Additionally, with tightening global regulations on emissions and fossil-fuel vehicles, this project would
allow Liz to stay ahead of industry trends and position itself as a leader in sustainable automotive
technology. The project also promised to strengthen Liz’s brand, appealing to eco-conscious consumers
and ESG-focused investors while boosting employee morale and retention. Moreover, adopting solid-state
batteries would provide Liz with a competitive edge in the increasingly crowded EV market, offering safer,
lighter, and more efficient technology. Financially, the project was expected to bring in $200 million
annually starting in year five, while giving Liz greater control over costs by producing its own batteries and
exploring new revenue opportunities with other automakers.
Anthony needed to carefully evaluate the project's risks and rewards by considering key financial
criteria. He should assess its financial viability through measures like Net Present Value (NPV), determining
if the project generates sufficient long-term cash flow to justify the upfront costs, and Internal Rate of
Return (IRR), ensuring the return on investment exceeds Liz’s cost of capital. Additionally, the payback
period must be examined to determine how quickly the $800 million investment can be recovered, given
that returns only begin in year five. Finally, conducting sensitivity analysis would help gauge how factors
such as interest rate fluctuations, competitor actions, or shifting consumer preferences might impact the
project's profitability
3. What is the hurdle rate would you use for this project?
Hurdle rate is the minimum acceptable rate of return that a project must earn to offset the cost of
investment (Lioudis, 2024). In the case of Liz, since the project will be financed by the issuance of bonds,
it is safe to assume that hurdle rate will be equivalent to the after-tax cost of debt which is 8%. Should the
project be financed by a mixture of debt and equity investments, then it will be safe to use the weighted
average cost of capital. Further, should project is fully funded by equity shareholders, then the cost of
equity is safe to be considered as hurdle rate.
4. Base model: project the cashflows for 2023 to 2035 and evaluate the investment decision by
calculating the NPV, Payback, IRR, and PI.
The base model provides an NPV of -21.45mio, a payback period of 8.67 years; and IRR of 7.66% and a
profitability index of 0.97. In assessing whether to continue with the investments, each model has the
following evaluating criteria:
NPV – if positive, accept; if negative reject. Since NPV is -21.45mio, per NPV evaluation, project should be
rejected.
Payback Period – short payback, accept; long payback, reject. Per payback evaluation, project will
breakeven by around 9 years (8.67 years to be exact), hence project must be rejected.
IRR – computed hurdle rate or required rate of return for bondholders is 8% after tax, IRR is only 7.66%
which is lower that hurdle rate telling Liz to not push through with the project.
Profitability Index – PI of 1 means project will breakeven; higher than 1 means acceptable and lower than
1 means reject the project. In this case, PI is 0.97 means to reject the project.
5. Sensitivity Analysis: complete the sensitivity analysis based on the list of uncertainties given in the
case.
a.
Increase federal interest rates in 2023 to 8.5% after tax
Following the above evaluation, a further increase in federal interest rates would mean an increase
in the hurdle rate by 0.5% meaning that NPV will further be lowered, difference between new
hurdle rate vs. IRR will be higher and PI would be further lower than 0.97. Please note that
payback is computed without regard to present value of cashflows, hence no further changes is
noted per payback evaluation.
b.
Issuance of 12-year green bond resulting to after tax cost of debt by 7.5%
The decrease in hurdle rate means a lower capitalization requirement for the project. If after-tax
cost of debt is 7.5%, the new NPV will 10.2mio; project will breakeven in 12 years using discounted
payback period; IRR would not be higher than hurdle rate; and PI will be greater than 1 making the
project a good to go.
c.
EU implements carbon border adjustment mechanism in 2026, returns will increase to 220mio per
year
Cash inflow will be increased to 220mio signaling that the project will become profitable.
Evaluating the project, however, will need consideration of political risks and opportunities as this
is mainly driven by a political move from EU.
d.
Selling of new technology at 100mio at the end of 12th year
Despite the total impact of the project selling of the project is only 39.7mio, pushing through the
project today may not be profitable.
e.
More valuable than expected with 210mio annually from 5th year and be worth 810mio in 2023
Cash inflows will be increase to 210mio causing an increase NPV to 10.79mio. However, there is an
810mio opportunity cost since Liz may able to sell the project and devout the same to using to
other investment opportunity. In this case, considering the impact of opportunity cost, Liz should
still accept the project knowing that a positive NPV signals a profitable endeavor.
f.
Entrance of new market competitors with 180mio expected annual returns
Having a 200mio returns already provides a bird-eye’s view that the project is not profitable,
further lowering it to 180mio will only mean losing more money.
g.
Discontinued in 2028 with a salvage value of 500mio
The NPV if Liz will continue the project would be 749.59mio. if it will be discontinued by 2028 by
selling it at 500mio, the NPV will be 295.97mio. It is safe to assume that Liz must continue the
project rather than selling.
On the other hand, IRR of the discontinued projects is 89.06% higher than the 77.42% for
continued project. The better way to explain that NPV will be appropriate in the project evaluation
since NPV assumes intermediate cash flow will be reinvested by 8% while IRR presumes that
intermediate cash flow will be reinvested at 89.06% which is quite heavy and impossible for Liz.
h.
Gradual acceptance of technology in the market with return on the 5th year at 152mio and will
grow by 5% annually
Even though the average cash flow is 202mio, higher than the 200mio under the base model, NPV
further decrease from -21.45mio to -38.65mio as more cash flows are pushed back in time
applying the principles of time value of money.
i.
Shorten the life span of the project to 10 years with hydrogen-powered vehicles and wiping out
the salvage value of the technology
Using the above probability, per NPV, IRR and PI evaluation, expected profitability would still be
lower than the base model.
j.
Incorporate inflation rate of 3% in the analysis
PV of each CF = Real CF x (1 + Inflation)n (1 + Nominal Hurdle)n
Inflation would have caused an increased in IRR to 10.89% however still lower than nominal hurdle rate
at 11.24%.
6. Consider all qualitative factors for an ESG project. Which ones are most relevant and important for
this particular project?
For this project the following qualitative factors are most relevant:
 Adherence to rules and regulations
 Brand reputation
 Risk mitigation and management
 Financial planning and performance
 Stakeholder engagement
 Leadership and innovation
7. What recommendations should Anthony bring to the chief executive officer and the board at their
upcoming meeting? Summarize your analysis and make a decision.
Using various evaluation tools like NPV, IRR, PI, and Payback provided clear insights for decision-makers to
assess the project's profitability and determine whether to move forward with the investment. These tools
also helped estimate the cash inflows needed to break even with the outflows, offering a chance to
reconsider or reinvest if the inflows fall short of the initial investment.
Based on the initial analysis, the plan to invest in a state-of-the-art ESG technology would not be viable for
Liz. The project currently shows a negative NPV, a lower IRR, a longer payback period, and a lower PI,
making it an unattractive option. However, this opens the door to exploring at least three alternative
scenarios with positive metrics that Anthony can present at the upcoming meeting. These alternatives
could help strengthen the case and highlight feasible paths for the investment.
References:
Lioudis, N. (2024, April 14). Hurdle Rate (MARR) vs. Internal Rate of Return (IRR): What's the Difference?
Investopedia. https://www.investopedia.com/ask/answers/042415/what-relationship-between-hurdlerate-marr-and-internal-rate-return-irr.asp