Electric Car Background - Business Decision Making - ثاني ثانوي

14 The Electric Car ☐ Project www.ien.edu.sa In this project, you will use Microsoft Excel to see if the Electric Car Company has enough cash to get through the next three years without needing external financing. This project will introduce some key factors that affect businesses which need to constantly develop their products while remaining profitable. It is vital to understand the company's planned phases, and how they can gradually improve their products over time in a competitive market. This chapter will have you focus on three economic scenarios that the com- pany may face. You will need to use the skills you've learned so far to see how the company can meet its financial targets in each scenario. LEARNING OBJECTIVES Once you have completed this chapter, you should be able to: 1 2 Identify factors that impact on innova- tive companies Explain the impact of external factors on business' changing markets 3 Represent information and highlight patterns and trends in data 4 Evaluate the support available to businesses in a period of transition 5 Create a report that documents your analysis and findings وزارة التعليم Ministry of Education 2024-1446 Business Decision Making S1 S2 S3.indb 465 The Electric Car Project 465 30/06/2023 14:29

466 14 Chapter رة ا Ministry of Education 2024-1446 Business Decision Making S1 S2 S3.indb 466 Electric Car Background Twenty years ago, Ahmad was the vice president of engineering for one of the Kingdom of Saudi Arabia's major automobile manufacturers. However, Ahmad was worried about the harmful effects of burning gasoline inside internal com- bustion engines. He was convinced that eventually, these engines would become unpopular because of their environmental impact. He wanted the company to start making battery-powered vehicles, but after much debate, management decided against the move. Frustrated, Ahmad left the company and started his own business. He and a few young engineers started a company, which they named Electric Car. Ahmad and his team were sure they could make an attractive vehicle that would achieve high speeds while running solely on battery power. They were sure they could sell the car to an increasingly wealthy public who, over time, would become more concerned about environmental issues and would look for alter- natives to fossil fuels. FIGURE 14-1: Ahmad's company, Electric Car, has reached a crucial time in its operations 30/06/2023 14:29

وزارة التعليم Ministry of Education 2024-1446 Business Decision Making S1 S2 S3.indb 467 Electric Car's three-phase strategy 1. In the first phase, the company would develop an expensive sports car. This might not be profitable, but it would establish the company's brand. 2. In the second phase, they would introduce a more affordable car that would have a broader appeal. This sedan would firmly establish Electric Car as a successful automobile company that would be in business for a long time. 3. In the third phase, the company would modify the roofs of its cars to gener- ate solar power that would continuously recharge the vehicle's battery. The first- and second-phase cars would not burn gasoline. However, their batter- ies would need to be charged occasionally, which means a power plant some- where in the country would have to discharge hydrocarbons into the air to create electricity for recharging. This process would be cleaner than burning gasoline inside a car engine, but Ahmad and his team wanted to be able to say their cars required no burning of hydrocarbons and generated no pollution. In the third phase of its strategy, the company would modify the roofs of its cars to include solar panels which would generate solar power that continuously recharges the batteries. This could potentially eliminate the need for the vehicles to use any gasoline. Ahmad wants to be certain that the company is financially stable before making the investments that will be needed for this next phase. At first, Electric Car invested a substantial amount of money. Major expenditures included: . building a factory . research and development (R&D)—a process businesses go through to develop new products and improve existing products creating a network of charging stations sports car trade-in guarantees—an agreement that Electric Car will dis- count a certain amount (or percentage of the car's value) in years to come when the buyer wishes to replace their electric vehicle with a newer model. Electric Car's sports car sold well immediately because of its sleek lines, quick acceleration, and their generous trade-in option. In the plan, a buyer was guaranteed that the sports car would be guaranteed a good trade-in value for eight years towards the purchase of a new car. The Electric Car Project 467 30/06/2023 14:29

468 14 Chapter رة ا Ministry of Education 2024-1446 Business Decision Making S1 S2 S3.indb 468 For example, a sports car purchased in 2015 from Electric Car for SAR 240,000 would be guaranteed to be worth SAR 188,000 in 2022, SAR 180,000 in 2023, and SAR 172,000 in 2024. The trade-in program helped to persuade prospective buyers in the company's early years. There were some initial claims against Electric Car, but the program has not been a great financial drain on the company in recent years. However, the company's accountants say that a liability must be recorded for potential claims, which are estimated to be SAR 3.75 billion at most. Management thinks the trade-in program is no longer needed and has discontinued it for future years, but the potential liability for older sales still exists. Electric Car has reached the end of the first phase of its strategy and is looking forward to the second phase. Two major developments in recent years will require capital expenditures in the future: · . Electric Car engineers have designed and learned to build a reasonably priced family sedan, which they plan to start selling next year. As sales increase, the production lines will be expanded accordingly. Through their R&D, company engineers have learned to make a better battery that will increase travel distance between recharges. This gives them a marketing advantage for the future. They have entered into a joint venture with their battery supplier to put their R&D to best use. A joint venture is when two businesses enter into a mutually beneficial agreement to deliver a product or service that would be difficult-or impossible to do independently. They will build their own plant to make next-generation car batteries, which will ensure a stable supply of batteries at more controllable costs. This is an important time for the company. Management hopes that family sedan sales will be enough to establish profitability within the next three years. If Electric Car can achieve these profit goals, management believes the company will be in the car business for the long run. At this point the company has SAR 33.75 billion in cash, but management knows that much of this money will be spent in the next three years. Here is the key financial question for management: How likely is it that the company can make it through 2025 without having to borrow any new capital? 30/06/2023 14:29