Finance Case

CASESTUDY Goodweek Tires, Inc. After extensive research and development, Goodweek Tires,Inc. , has recently certain a new expel, the SuperTread, and moldiness decide whether to shed light on the investment unavoidable to generate and mart the SuperTread. The tire would be ideal for drivers doing a full-grown amount of wet weather and off-road driving in addition to its form freeway usage. The research and development constitutes so far wide-cut about $10 million. The SuperTread would be put on the food market tooth root this social class and Goodweek expects it to stay on the market for a total of 4 years.Test marketing costing $5 mil-lion shows that there is a significant market for a SuperTread-type tire. As a financial analyst at Goodweek Tires, you atomic number 18 asked by your CFO, Mr. Adam Smith, to evaluate the SuperTread project and provide a recommendation on whether to go ahead with the investment. You are informed that all foregoing investments in the Super Tread are sunk costs and only future gold flows should be considered . Except for the initial investment which testament occur this instant assume all cash flows will occur at year-end.Goodweek must initially invest $120 million in carrefourion equipment to make the SuperTread. The equipment is expected to have a seven-year useful life. This equipment can be change for $51,428,571at the end of four years. Goodweek intends to sell the SuperTread to two distinct markets 1. The Original Equipment manufacturer (OEM) Market The OEM market consists primarily of the large automobile companies (e. g. , General Motors) who acquire tires for new cars. In the OEM market, the SuperTread is expected to sell for $36 per tire. The variable cost to produce each tire is $18. 2.The Replacement Market The replacement market consists of all tires purchased after the auto-mobile has left the factory. This market allows higher margins and Goodweek expects to sell the SuperTread for $59 per tire th ere. versatile costs are the same as in the OEM market. Goodweek Tires intends to raise prices at 1 percent higher up the ostentation rate. Variable costs will in any case increase 1 percent above the inflation rate. In addition, the SuperTread project will incur $25 mil-lion in marketing and general administration costs the first year (this cipher is expected to increase at the inflation rate in the concomitant years).Goodweeks corporate tax rate is 40 percent. Annual inflation is expected to remain constant at 3. 25 percent. The company uses a 15. 9 percent discount rate to evaluate new product decisions. The tire market Automotive industry analysts expect automobile manufacturers to produce 2 million new cars this year and production to grow at 2. 5 percent per year thereafter. Each new car take four tires (the spare tires are undersized and are in a different category). Goodweek Tires expects the SuperTread to capture 11 percent of the OEM market.Industry analysts estimat e that the replacement tire market size will be 14 million tires this year and that it will grow at 2 percent annually. Goodweek expects the SuperTread to capture an 8 per-cent market share. You decide to use the MACRS depreciation schedule (seven-year property class). You also decide to consider send away working capital (NWC) requirements in this scenario. The warm initial working capital requirement is $11 million, and thereafter the net working capital requirements will be 15 percent of sales. What will be the NPV, payback period, discounted payback period, AAR, IRR, and PI on this project?