CASESTUDY: Goodweek Four tires, Inc. Following extensive r and d, Goodweek Auto tires, Inc., has recently developed a brand new tire, the SuperTread, and must determine whether to make the investment necessary to produce and market the SuperTread.
The tire will be ideal for drivers doing a large amount of wet weather conditions and all-terrain driving furthermore to its normal freeway usage. Your research and development costs up to now total about $10 million. The SuperTread would be placed on the market beginning this year and Goodweek expects it to stay on the market for a total of four years.
Test marketing priced at $5 mil-lion shows that there exists a significant market for a SuperTread-type tire. Like a financial expert at Goodweek Tires, you are asked by your CFO, Mr. Adam Smith, to evaluate the SuperTread project and supply a suggestion on whether to go forward with the expense. You are informed that previous purchases of the SuperTread are sunk costs and later future funds flows should be thought about. Except for the first investment that can occur instantly, assume all cash flows will occur by year-end.
Goodweek must primarily invest $120 million in production gear to make the SuperTread. The equipment is definitely expected to include a seven-year useful existence. This equipment can be sold for $51, 428, 571at the end of four years. Goodweek intends to sell the SuperTread to two specific markets: 1 . The Original Tools Manufacturer (OEM) Market The OEM industry consists mostly of the large automobile companies (e. g., General Motors) who get tires for brand spanking new cars. In the OEM industry, the SuperTread is likely to sell for $36 per tire. The variable cost to create each car tire is $18. 2 .
The Replacement Marketplace The alternative market contains all auto tires purchased following your auto-mobile has left the factory. The foreign exchange market allows bigger margins and Goodweek wants to sell the SuperTread intended for $59 every tire there. Variable costs are the same as in the OEM market. Goodweek Tires hopes to raise prices at 1% above the inflation rate. Variable costs will also increase 1 percent above the inflation rate. In addition , the SuperTread project will certainly incur $25 mil-lion in marketing and standard administration costs the initially year (this figure is usually expected to boost at the inflation rate in the subsequent years).
Goodweek’s company tax price is 40 percent. Twelve-monthly inflation is expected to continue to be constant by 3. 25 %. The company works on the 15. on the lookout for percent discount rate to judge new product decisions. The tyre market Automotive aftermarket analysts expect automobile companies to produce 2 million new cars this season and creation to develop at installment payments on your 5 percent each year thereafter. Every single new car needs 4 tires (the spare auto tires are undersized and are in a different category). Goodweek Four tires expects the SuperTread for capturing 11 percent of the ORIGINAL EQUIPMENT MANUFACTURING market.
Sector analysts approximate that the alternative tire market size will probably be 14 , 000, 000 tires this coming year and that it will grow at 2 percent annually. Goodweek expects the SuperTread for capturing an almost eight per-cent market share. You decide to utilize the MACRS depreciation schedule (seven-year property class). You also plan to consider net working capital (NWC) requirements through this scenario. Instant initial seed money requirement is usually $11 , 000, 000, and thereafter the net working capital requirements will be 15 percent of revenue. What will always be the NPV, payback period, discounted payback period, AAR, IRR, and PI with this project?