After extensive research and development, Goodweek Tires, Inc., has recently developed a new tire, the SuperTread, 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 SuperTread would be put on the market beginning this year, 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 SuperTread-type tire.

As a financial analyst at Goodweek Tires, you have been asked by your CFO, Adam Smith, to evaluate the SuperTread project to provide a 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 $185 million in production equipment to make the SuperTread. This equipment can be sold for $75 million at 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 (like General Motors) that buy tires for new cars. In the OEM market, the SuperTread is expected to sell for $43 per tire. The variable cost to products each tire is $31.
2. 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 $64 per tire there. Variable costs are the same as in the OEM markets.

Goodweek Tires intends to raise prices at 1% above the inflation rates; variable costs also will increase at 1% above the inflation rate. In addition. The SuperTread project will incur $53 million in marketing and general administration costs the first year. This cost is expected to increase at the inflation rate in the subsequent years.

Goodweeks corporate tax rate is 23%. Annual inflation is expected to remain constant at 3.25%. The company uses a 13.4% discount rate to evaluate new product decisions. Automotive industry analysts expect automobile manufacturers to produce 8.5 million new cars this year and for production to grow at 2.5% per year thereafter. Each new car needs four tires (the spare tires are undersized and are in a different category). Goodweek Tires expects the SuperTread to capture 11% of the OEM market.

Industry analysts estimate that the replacement tire market size will be 35 million tires this year and that it will grow at 2% annually. Goodweek expects SuperTread to capture an 8% market share.

The appropriate depreciation schedule for the equipment is the 7-year MACRS depreciation schedule. The immediate initial working capital requirement is $10 million. Thereafter, the net working capital requirements will be 15% of sales.

What are the NPV, payback period, discounted payback period, IRR, and PI on this project?