Master it! Solution Research and development $ 10,000,000 PUT IN THE INPUTS FROM THE CASE ON MASTER IT TAB Test marketing cost $ Initial equipment cost $ Equipment salvage value $ 5,000,000 You need a number in anything that is yellow highlighted 120,000,000 THE ANSWERS FOR THE CASE WILL POPULATE BELOW IN THE BLUE 51,000,000 Year 1 depreciation Year 2 depreciation 14.30% 24.50% 17.50% 12.50% Year 3 depreciation Year 4 depreciation OEM market: Price Variable cost Automobiles produced Growth rate Market share Replacement market: Price Variable cost Market sales St St $ 36 $ 18 5,600,000 2.50% 11.00% Growth rate Market share St St $ 59 $ 18 16,000,000 2.00% 8.00% Price increase above inflation 1% VC increase above inflation 1% Marketing and general costs $ 25,000,000 Tax rate 21% Inflation rate 3.25% Required return 15.90% Initial NWC $ 9,000,000 NWC percentage of sales 15% Nominal price increase Nominal VC increase OEM: Automobiles sold Tires for automobiles sold SuperTread tires sold Price Year O 4.28% 4.28% Year 1 Year 2 Year 3 Year 4 5,600,000 22,400,000 $ 2,464,000 36.00 $ 5,740,000 22,960,000 2,525,600 37.54 $ 5,883,500 23,534,000 2,588,740 6,030,588 24,122,350 2,653,459 39.15 $ 40.83 Replacement market: Total tires sold in market 16,000,000 SuperTread tires sold 1,280,000 16,320,000 1,305,600 16,646,400 1,331,712 Price $ 59.00 $ 61.53 $ 64.16 $ 16,979,328 1,358,346 66.91 Variable cost per unit: OEM market Replacement market SS $ 18.00 $ $ 18.00 $ 18.77 $ 18.77 $ 19.57 $ 19.57 $ 20.41 20.41 Revenue: OEM market $ Replacement market Total $ 88,704,000 $ 75,520,000 164,224,000 $ 94,815,318 $ 80,329,227 175,144,544 $ 101,347,678 $ 85,444,713 186,792,391 $ 108,330,090 90,885,960 199,216,050 Variable costs: OEM market $ Replacement market 44,352,000 $ 23,040,000 47,407,659 $ 24,507,222 50,673,839 $ 26,067,878 54,165,045 27,727,920 Total $ 67,392,000 $ 71,914,881 $ 76,741,717 $ 81,892,965 Revenue $ 164,224,000 $ 175,144,544 $ 186,792,391 $ 199,216,050 Variable costs 67,392,000 71,914,881 76,741,717 81,892,965 Marketing and general costs 25,000,000 25,812,500 26,651,406 27,517,577 Depreciation 17,160,000 29,400,000 21,000,000 15,000,000 EBT $ 54,672,000 $ 48,017,164 $ 62,399,267 $ 74,805,508 Tax 11,481,120 10,083,604 13,103,846 15,709,157 Net income $ 43,190,880 $ 37,933,559 $ 49,295,421 $ 59,096,351 OCF $ 60,350,880 $ 67,333,559 $ 70,295,421 $ 74,096,351 New working capital: Beginning 0 $ Ending NWC cash flow $ 9,000,000 (9,000,000) $ 9,000,000 $ 24,633,600 (15,633,600) $ 24,633,600 $ 26,271,682 (1,638,082) $ 26,271,682 $ 28,018,859 28,018,859 (1,747,177) $ 28,018,859 Book value of equipment $ 120,000,000 $ 102,840,000 $ 73,440,000 $ 52,440,000 $ 37,440,000 Aftertax salvage value: Market value $ 51,000,000 Taxes (2,847,600) Total $ 48,152,400 Year O Operating cash flow Year 1 60,350,880 $ Year 2 Year 3 Year 4 67,333,559 $ 70,295,421 $ 74,096,351 Capital spending $ (120,000,000) 48,152,400 Net working capital Total cash flows $ (9,000,000) (129,000,000) $ (15,633,600) 44,717,280 $ (1,638,082) 65,695,478 $ (1,747,177) 68,548,244 $ 28,018,859 150,267,610 NPV $ 85,797,356.54 IRR 40.24% Profitability index 1.6651