Notes
R&D = $10M
Stay on market for 4 years
Test Marketing cost = $5M
Initial Investment = $120M
Salvage (to be sold at cost) = $51M
Two Markets = OEM and Replacement
OEM will sell at $36/tire and Variable Cost is $18 each
Replacement will sell at $59/tire and Variable Cost is $18 each
Prices will increase at 1% above the inflation rate
Variable costs will increase at 1% above the inflation rate
Marketing and General Admin Costs = $25M in Year 1 and will increase at the inflation rate in the subsequent years
Corporate Tax Rate = 21%
Annual inflation will remain constant at 3.25%
15.9% Discount Rate to evaluate new product decisions
Production for new cars will be 2M Year 1 and grow at 2.5% per year after
OEM market will capture 11% market share
Replacement market will be 16M tires/year and will grow 2% annually
Supertread will capture 8% market share
Initial Working Capital requirement = $11M
Net Working Capital Requirements = 15% of sales
MACRS from IRS.gov
1 = 14.29% 2 = 24.49% 3 = 17.49% 4 = 12.49% 5 = 8.93% 6 = 8.92% 7 = 8.93% 8 = 4.46%

Perform Sensitivity Analysis on prices and market share for both OEM and Replacement.

Which market is more important to the tire company?

Data Sunk Cost $10,000,000 4 $5,000,000 $120,000,000 $51,000,000 Sunk Cost $36 $18 $59 $18 1 2 3 4 25,250,000 25,502,500 25,757,525 25,000,000 21% 3.25% 15.90% Research & Development Cost Project Life (Years) Test Marketing Cost Equipment Cost: Initial Investment Equipment Salvage Cost OEM Market: Sales Per Tire Variable Cost Replacement Market: Sales Per Tire Variable Cost Marketing & General Administration Costs: Years Marketing & General Administration Costs Corporate Tax Rate Annual Inflation remain Constant Discount Rate Production of Tire in EOM: Years Production of Tires Production of Tire in Replacement Market: Years Production of Tires Calculation of Depreciation: Years Depreciation Computation of Salvage Value of Equipment: Years Book Value Salvage Value Loss on Value Computation of Working Capital EOM: Years Working Capital Computation of Working Capital Replacement Market: Years Working Capital 1 8,000,000 2 8,200,000 3 8,405,000 4 8,615,125 1 4 2 16,320,000 3 16,646,400 16,000,000 16,979,328 1 2 3 12,068,100 4 8,618,100 9,860,100 16,898,100 1 2 3 4 $72,555,600 $51,000,000 $21,555,600 4 0 $11,000,000 1 $43,200,000 2 $44,280,000 3 $45,387,000 $46,521,675 1 2 3 4 0 $11,000,000 $141,600,000 $144,432,000 $147,320,640 $150,267,053 Data Sunk Cost $10,000,000 4 $5,000,000 $120,000,000 $51,000,000 Sunk Cost $36 $18 $59 $18 1 2 3 4 25,250,000 25,502,500 25,757,525 25,000,000 21% 3.25% 15.90% Research & Development Cost Project Life (Years) Test Marketing Cost Equipment Cost: Initial Investment Equipment Salvage Cost OEM Market: Sales Per Tire Variable Cost Replacement Market: Sales Per Tire Variable Cost Marketing & General Administration Costs: Years Marketing & General Administration Costs Corporate Tax Rate Annual Inflation remain Constant Discount Rate Production of Tire in EOM: Years Production of Tires Production of Tire in Replacement Market: Years Production of Tires Calculation of Depreciation: Years Depreciation Computation of Salvage Value of Equipment: Years Book Value Salvage Value Loss on Value Computation of Working Capital EOM: Years Working Capital Computation of Working Capital Replacement Market: Years Working Capital 1 8,000,000 2 8,200,000 3 8,405,000 4 8,615,125 1 4 2 16,320,000 3 16,646,400 16,000,000 16,979,328 1 2 3 12,068,100 4 8,618,100 9,860,100 16,898,100 1 2 3 4 $72,555,600 $51,000,000 $21,555,600 4 0 $11,000,000 1 $43,200,000 2 $44,280,000 3 $45,387,000 $46,521,675 1 2 3 4 0 $11,000,000 $141,600,000 $144,432,000 $147,320,640 $150,267,053