Finance Case

CASESTUDY Goodweek Tires, Inc. After extensive enquiry and development, Goodweek Tires,Inc. , has recently developed a fresh devolve, the SuperTread, and must mold whether to get out the investiture necessary to suffer and market placeplace the SuperTread. The travail would be ideal for drivers doing a rangy amount of wet weather and off-road private road in addition to its normal information superhighway usage. The research and development be so far total about $10 million. The SuperTread would be put on the market beginning this twelvemonth and Goodweek expects it to stay on the market for a total of four-spot classs.Test marketing liveing $5 mil-lion shows that thither is a significant market for a SuperTread-type tire. As a financial analyst at Goodweek Tires, you are asked by your CFO, Mr. transport Smith, to evaluate the SuperTread wander and provide a recomm cobblers lastation on whether to go out front with the investment. You are informed that every(preno minal) preceding investments in the SuperTread are sunk costs and only future cash flows should be considered . Except for the initial investment which go away occur adjacently assume either cash flows ordain occur at year-end.Goodweek must initially invest $ one hundred twenty million in production equipment to make the SuperTread. The equipment is anticipate to have a seven-year efficacious life. This equipment can be sold for $51,428,571at the end of four years. Goodweek intends to sell the SuperTread to two searching markets 1. The Original Equipment Manufacturer (OEM) Market The OEM market consists primarily of the large automobile companies (e. g. , full global Motors) who buy tires for impudently cars. In the OEM market, the SuperTread is expect to sell for $36 per tire. The variable cost to produce each tire is $18. 2.The electric switch Market The replacement market consists of all tires purchased after the auto-mobile has left the factory. This market allows h igh margins and Goodweek expects to sell the SuperTread for $59 per tire there. variable star costs are the same as in the OEM market. Goodweek Tires intends to raise prices at 1 pctage above the inflation aim. versatile costs will also join on 1 percent above the inflation rate. In addition, the SuperTread project will welcome $25 mil-lion in marketing and general administration costs the first year (this figure is expected to increase at the inflation rate in the ensuant 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 bracing product decisions. The tire market self-propelled 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 needs four tires (the nude tires are undersized and are in a different category). Goodweek Tires expects the Sup erTread to capture 11 percent of the OEM market.Industry analysts estimate 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 dimension class). You also decide to consider lucre on the job(p) capital (NWC) urgencys in this scenario. The immediate 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, requital period, discounted payback period, AAR, IRR, and PI on this project?