Liz Motor Corp: Capital Budgeting for an ESG Project

Annie Anthony, the chief financial officer of Liz Motor Corp. (Liz), was attempting to use capital budgeting to evaluate an environmental, social, and governance (ESG) project using all the available quantitative and qualitative information. Anthony had planned an ESG project, which would help the company adopt solid-state battery technology for most Liz electric vehicles and reduce the carbon footprint of electric vehicle batteries by 39 per cent, to improve the company’s ESG and sustainability. The technology was so new that Liz would be the first major automaker to use it on a large scale. It would increase sales and the profit margin in the long run but would also require a heavy initial investment to allow Liz to adopt the technology. With all the information needed for a thorough capital budgeting analysis, Anthony believed she was ready to develop a framework to comprehensively evaluate this critical project. She also needed to do ten sensitivity analyses based on ten different scenarios.

This case is designed for an undergraduate- or graduate-level managerial accounting, finance, or sustainability course. It is suggested for use in teaching capital budgeting and net present value analysis. It can also be used as an assignment or group or individual exercise or exam to reinforce the concepts introduced in lectures. This short and simple—but rich—case can help students firmly grasp the vital capital budgeting process in the interesting setting of ESG project evaluation. The investment decisions described in the case are not complex and involve straightforward calculations, allowing the instructor to show students clear and unambiguous answers and processes and to elaborate on the essential underlying concepts of time value of money and risk-return trade-off. Meanwhile, there are also plenty of qualitative factors that a class discussion can expand on. After working through the case and assignment questions, students will be able to do the following:<br><br><ul><li>Complete a quantitative capital budgeting analysis based on time value of money.</li><li>Calculate and interpret the net present value, internal rate of return, payback period, discounted payback period, and profitability index for a project.</li><li>Assess the cost of financing (i.e., hurdle rate) based on risk-return trade-off and study how financing affects project evaluation.</li></li>Conduct an in-depth sensitivity analysis on different inputs based on a variety of scenarios.</li><li>Analyze benefits and risks of an ESG project qualitatively and quantitively.</li></ul>

• capital budgeting
• net present value
• internal rate of return
• envirnonment
• sustainability
• sensitivity analysis
• project evaluation
• scenario analysis