Goodweek Tires, Inc.

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, 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 SuperTread$-$type tire.

As a financial analyst at Goodweek Tires, you have been asked by your CFO, Adam Smith, to evaluate the SuperTread project and 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:

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 produce each tire is $$31.$

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

market.

Goodweek Tires intends to raise prices at $1$ percent above the inflation rate; variable costs also will increase at $1$ percent 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.

Goodweek's corporate tax rate is $23$ percent. Annual inflation is expected to remain constant at $3\mathrm{.}25$ percent. The company uses a $13\mathrm{.}4$

percent discount rate to evaluate new product decisions. Automotive industry analysts expect automobile manufacturers to produce $8\mathrm{.}5$

million new cars this year and for production to grow at $2\mathrm{.}5$ percent 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 $11$ percent 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 $2$ percent

annually. Goodweek expects the SuperTread to capture an $8$ percent 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 $15$ percent of sales. What are the NPV$,$

payback period, discounted payback period, IRR, and PI on this project?

Use the exce sheet attached to sove this question accurately.

Sol Opportunity cost $($factory site$),$ after$-$tax

of sales

per unit

per unit

annually

YR $0$

YR $1$

YR $2$

YR $3$

YR $4$

YR $5$

Opportunity cost $($factory site$),$ after$-$taxve the above using the excel mode attached.