Goodyear has developed a new tire, the iceGUARD, and must decide whether to make the investment necessary to produce and market the iceGUARD. The research and development costs so far total about $10 million and marketing costs of $7.2 million. The iceGUARD will stay on the market for 5 years.

As a financial analyst at Goodyear, you are to evaluate the iceGUARD project and provide a recommendation on whether to go ahead with the investment. You are informed that all previous investments in the iceGUARD are sunk costs and only future cash flows should be considered. Except for the initial investment which will occur immediately, assume all cash flows will occur at year-end.

Goodyear must initially invest $600 million in production equipment to make the iceGUARD. The equipment is expected to have a 7-year useful life. This equipment can be sold for $50 million at the end of 5 years.

Goodyear intends to sell the iceGUARD to two distinct markets:

1. The Original Equipment Manufacturer (OEM) Market.

The OEM market consists primarily of automobile companies who buy tires for new cars. In the OEM market, the iceGUARD is expected to sell for $45 per tire. The variable cost to produce each tire is $23. Each new car needs 4 tires. Goodyear expects the iceGUARD to capture 5 percent of the OEM market. Automobile manufacturers will produce 17.5 million new cars this year and production to grow at 2.3 percent per year thereafter.

2. The Replacement Market.

The replacement market consists of all tires purchased after the automobile has left the factory. The iceGUARD is expected to sell for $60 per tire there. Variable costs are $23. The replacement market will have 210 million tires and will grow at 2% annually. Goodyear expects the iceGUARD to capture a 2 percent market share.

Both prices and variable costs will rise at 2% above the inflation rate. In addition, the iceGUARD project will incur $35 million in costs the first year (this figure is expected to increase at the inflation rate in the subsequent years).

Goodyear's corporate tax rate is 21 percent. Annual inflation is expected to remain constant at 3.00 percent.

You decide to use the MACRS depreciation schedule (seven-year property class). You also decide to consider net working capital (NWC) requirements in this scenario. The immediate initial working capital requirement is $30 million, and thereafter the NWC requirements will be 20 percent of sales.

Calculate the Payback Period (PB)