$$

Master It! Solution Research and development Initial equipment cost Test marketing cost Equipment salvage value Year 1 depreciation Year 2 depreciation Year 3 depreciation Year 4 depreciation 10,000,000 5,000,000 160,000,000 65,000,000 14.30% 24.50% 17.50% 12.50% OEM market: Price 41 Variable cost 29 Automobile production 6,200,000 Growth rate 2.50% Market share 11.00% Replacement market: Price Variable cost Market sales Growth rate Market share 62 29 32,000,000 2.00% 8.00% Price increase above inflation VC increase above inflation 1% 1% Marketing and general costs Tax rate 43,000,000 23% Inflation rate 3.25% Required return 13.40% 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 Replacement market: Total tires sold in market SuperTread tires sold Price Revenue: OEM market Replacement market Total Variable costs: OEM market Replacement market Total Revenue Variable costs Marketing and general costs Depreciation. EBT Tax Net income OCF New working capital: Beginning Ending NWC cash flow. Book value of equipment Aftertax salvage value: Market value Taxes Total Operating cash flow Capital spending Net working capital Total cash flows NPV IRR Profitability index Year 0 Year 1 Year 2 Year 3 Year 4 Year 0 Year 1 Year 2 Year 3 Year 4