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F. Naz
F. Naz, Chartered Accountant
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Experience:  Experience with chartered accountancy
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After extensive research and development, Goodweek Tires, Inc

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After extensive research and development, Goodweek Tires, Inc has recently developed a new tire, the Super Tread, and must decide whether to make the investment necessary to produce and market it. The tire would be ideal for drivers doing a large amount of wet weather and off – road driving in addition to normal freeway usage. The research and development costs so far have totaled about $10 million. The Super Tread would be put on the market beginning this year, and Goodweek expects it to stay on the market for a total of four years. Test marketing costing $5 million has shown that there is a significant market for a Super Tread – type tire.

As a financial analyst at Goodweek tires, you have been asked by your CFO, XXXXX XXXXX, to evaluate the Super Tread project and provide recommendation on whether to go ahead with the investment. Except for the initial investment that will occur immediately, assume all cash flows will occur at year – end.

Goodweek must initially invest $140 million in production equipment to make the Super Tread. This equipment can be sold for $54 million at the end of four years. Goodweek intends to sell the Super Tread to two distinct markets:
The original equipment manufacturer (OEM) market: The OEM market consists primarily of the large automobile companies (Like General Motors) that buy tires for new cars. In the OEM market, the SuperTread is expected to sell for $38 per tire. The variable cost to produce each tire is $22.
The replacement market: The replacement market consists of all tires purchased after the automobile has left the factory. This market allows higher margins; Goodweek expects to sell the SuperTread for $59 per tire there. Variable costs are the same as in the OEM market.
Goodweek Tires intends to raise prices at 1 percent above the inflation rate; variable costs will also increase at 1 percent above the inflation rate. In addition, the SuperTread project will incur $26 million in marketing and general administration costs the first year. This costs is expected to increase at the inflation rate in the subsequent years.

Goodweek’s 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. Automotive industry expect automobile manufacturers to produce 5,6 million new cars this year and production to grow at 2,5 percent per year thereafter. Each new car needs four tires ( the spare tires are undersized and are in different category). Goodweek Tires expects the SuperTread to capture 11 percent of the OEM market.

Industry analyst 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 percent market share.

The appropriate depreciation schedule for the equipment is the seven – year MACRS depreciation schedule. The immediate initial working capital requirement is $9 million. Thereafter, the net working capital requirements will be 15 percent of sales. What are the NPV, payback period, discounted payback period, IRR and PI on this project?

Muhammad Jawaad Ahmed :

By wht time do you need the answer thanks.

Customer: By this evening ;
Customer: by this evening. Thanks a lot
Muhammad Jawaad Ahmed :

Have a nice day Click here for solution

F. Naz, Chartered Accountant
Category: Homework
Satisfied Customers: 5231
Experience: Experience with chartered accountancy
F. Naz and other Homework Specialists are ready to help you
Customer: replied 3 years ago.

Thanks a lot.

I checked your file, but it was a little bit hard since you work in million. I am pretty sure that the answer need to be in the whole numbers. I will appreciate you to format your numbers and send the file again.

By what time do you need the answer take care.
Customer: replied 3 years ago.

By tomorrow noon or tomorrow evening (the latest) would be great.

Thank you so much.

Take care as well and have a great night.

Customer: replied 3 years ago.

By Friday Noon or Friday Evening (the latest) would be good.

Thank you so much.

Take care as well and have a great night.

Customer: replied 3 years ago.
Hi Muhammad;
Thanks a lot for supporting me with this question. I checked some of your work and I mentioned that you increased the marketing expense in 2.5 instead of 3.25%. I am not sure if this is the inflation rate of the case, but you need to apply the inflation rate and you applied another rate.
also in year 4 of the class flow,you add 51M and that number is adding the number in the row.Finally, I think you did not include the money for the salvage value in year 4.
One more thing, can you please check the net working capital cash flow one more time.
I appreciate if you can reformat and make the corrections.

Thanks again
I had written .025 instead of .0325, however, I have made the changes and have also checked working capital and the salvage value, they are correct.

Click here for revised solution

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