Goodweek Tires, Inc. Input area: Research and development Test marketing cost Initial equipment cost Equipment salvage value Price Variable cost (VC) Price and VC increase Selling, general and administrative (SG&A) SG&A increase Tax rate Required return Market sales Growth rate Market share Initial NWC NWC percentage of sales Year 1 depreciation Year 2 depreciation Year 3 depreciation Year 4 depreciation 14.29 24.49 Source: https://www.img.gov/publication/p946/a102.html 17.49% 7 year class asset 12.4944 x fx H A B Output area: Your 0 Year 1 Year 2 Year 3 Year 4 Depreciation rate Depreciation opens Book value Year o Yoar 1 Your 2 Year 3 Year 4 Revenue Variable costs SGRA Depreciation EBT Net income Depreciation OCF Antax salvage value: Salvage value Taxes (SV-BV Total Now working capital Beginning Ending NWC cash flow Year Yeart Year 2 Year 2 Yoar 4 Operating cash flow Capital spending Afterfax salvage value Not working capital Total cash flows NPV IRR MIRR GOODWEEK TIRES, INC. After extensive research and development, Goodweek Tires, Inc., has recently developed a new tiro, 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 SuperTread-type tire As a financial analyst at Goodweek Tires, you have been asked by your CFO, Adam Smith, to evaluate the Super Tread 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 S160 million in production equipment to make the Super Tread. This equipment is expected to be sold for $65 million at the end of four years. Goodweek intends to sell the SuperTread to two distinct markets. The original equipment manufacturer market consists primarily of the large automobile companies that buy tires for new cars. The replacement market consists of all tires purchased after the automobile has left the factory. The Super Tread is expected to sell for an average $51.17 per tire, and the variable cost to produce cach tire will be $29.00, both in the first year. Goodweek Tires intends to raise prices at 4.28 percent per year, variable costs will also increase at the same rite. In addition, the Super Tread project will incur $43 million in selling, general and administrative (SG&A) expenses in the first year. These expenses are expected to increase at 3.25 percent in the subsequent years. Goodweek's corporate tax rate is 40 percent. The company uses a 13.4 percent discount rate to evaluate new product decisions Industry analysts estimate that the tire make sure will be 48 million tires this year and that it will grow at 2.25 percentually, Goodweek Tires expects the Super Tread to capture 9.5 percent of the market share The immediate initial working capital requirement $9 million. Thereafter, the networking capital requirements will be 15 percent of sales. The appropriate depreciation schedule for the equipment in the seven-year MACRS depreciation schedule (please see the depreciation rates in the Excel spreadsheet). BE er Fir b) What should the average price for SuperTread be in the first year to this project have a Net Present Value equal to zero? Goodweek Tires, Inc. Input area: Research and development Test marketing cost Initial equipment cost Equipment salvage value Price Variable cost (VC) Price and VC increase Selling, general and administrative (SG&A) SG&A increase Tax rate Required return Market sales Growth rate Market share Initial NWC NWC percentage of sales Year 1 depreciation Year 2 depreciation Year 3 depreciation Year 4 depreciation 14.29 24.49 Source: https://www.img.gov/publication/p946/a102.html 17.49% 7 year class asset 12.4944 x fx H A B Output area: Your 0 Year 1 Year 2 Year 3 Year 4 Depreciation rate Depreciation opens Book value Year o Yoar 1 Your 2 Year 3 Year 4 Revenue Variable costs SGRA Depreciation EBT Net income Depreciation OCF Antax salvage value: Salvage value Taxes (SV-BV Total Now working capital Beginning Ending NWC cash flow Year Yeart Year 2 Year 2 Yoar 4 Operating cash flow Capital spending Afterfax salvage value Not working capital Total cash flows NPV IRR MIRR GOODWEEK TIRES, INC. After extensive research and development, Goodweek Tires, Inc., has recently developed a new tiro, 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 SuperTread-type tire As a financial analyst at Goodweek Tires, you have been asked by your CFO, Adam Smith, to evaluate the Super Tread 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 S160 million in production equipment to make the Super Tread. This equipment is expected to be sold for $65 million at the end of four years. Goodweek intends to sell the SuperTread to two distinct markets. The original equipment manufacturer market consists primarily of the large automobile companies that buy tires for new cars. The replacement market consists of all tires purchased after the automobile has left the factory. The Super Tread is expected to sell for an average $51.17 per tire, and the variable cost to produce cach tire will be $29.00, both in the first year. Goodweek Tires intends to raise prices at 4.28 percent per year, variable costs will also increase at the same rite. In addition, the Super Tread project will incur $43 million in selling, general and administrative (SG&A) expenses in the first year. These expenses are expected to increase at 3.25 percent in the subsequent years. Goodweek's corporate tax rate is 40 percent. The company uses a 13.4 percent discount rate to evaluate new product decisions Industry analysts estimate that the tire make sure will be 48 million tires this year and that it will grow at 2.25 percentually, Goodweek Tires expects the Super Tread to capture 9.5 percent of the market share The immediate initial working capital requirement $9 million. Thereafter, the networking capital requirements will be 15 percent of sales. The appropriate depreciation schedule for the equipment in the seven-year MACRS depreciation schedule (please see the depreciation rates in the Excel spreadsheet). BE er Fir b) What should the average price for SuperTread be in the first year to this project have a Net Present Value equal to zero