rate of return for the new strip mine. Should Bel the mine? You have been the project. Calculate the payback pe to make te GOODWEEK TIRES, INGC. nt, Goodweek Tires, Inc., has recently dev Tread, and must decide whether to make the and market it. The tire would be ideal for drivers doing a large After extensive research and development, a new tire, the SuperT to produce weather and off-road driving in addition to normal freeway usage. The re opment costs so far have totaled about $10 million. The Superau market beginning this year, and Goodweek expects it to stay on the market foru years. Test marketing costing $5 million has shown that there is a significant ot SuperTread-type tire As a financial analyst at Goodweek Tires, you have been asked by your CFO to evaluate the SuperTread project and provide a recommendation on whether the investment. Except for the initial investment that will occur immediately, o ahed flows will occur at year-end of wo for a total of fo market for Adam Smith that will occur immediately, assume all Goodweek must initially invest $160 million in production equipment to make SuperTread. This equipment can be sold for $65 million at the end of four years. Good intends to sell the SuperTread to two distinct markets: to make th 1. The original equipment manufacturer (OEM) market: The OEM market consists pri of the large automobile companies (like General Motors) that buy tires for new can the OEM market, the SuperTread is expected to sell for $41 per tire. The variable cos to produce each tire is $29 primarily cars. In market: The replacement market consists of all tires purchased after the automobile has left the factory. This market allows higher margins; Goodweek expects to sell the SuperTread for $62 per tire there. Variable costs are the same as in the OEM market. Goodweek Tires intends to raise prices at I percent above the inflation rate; variable cost will also increase at 1 percent above the inflation rate. In addition, the SuperTread project will incur $43 million in marketing and general administration costs the first year. This cost is expected to increase at the inflation rate in the subsequent years. Goodweek's corporate tax rate is 40 percent. Annual inflation is expected to reman constant at 3.25 percent. The company uses a 13.4 percent discount rate to evaluate new product decisions. Automotive industry analysts expect automobile manufacturers to po- duce 6.2 million new cars this year and production to grow at 2.5 percent per year thereafter. Each new car needs four tires (the spare tires are undersized and are in a different categor Goodweek Tires expects the SuperTread to capture 11 percent of the OEM market command CHAPTER 6 Making Capital Investment Decisions 207 dustry analysts estimate that the replacement tire market size will be 32 million tires this that it will gro w at 2 percent annually. Goodweek expects the SuperTread to capture year and an 8 percent market share. The appropriate depreciation schedule for the equipment is the seven-year MACRS depre- ciation schedule. The immediate initial working capital requirement is $9 million. Thereafter, the net working capital requirements will be 15 percent of sales. What are the NPV, payback period, discounted payback period, IRR, and PI on this project? rate of return for the new strip mine. Should Bel the mine? You have been the project. Calculate the payback pe to make te GOODWEEK TIRES, INGC. nt, Goodweek Tires, Inc., has recently dev Tread, and must decide whether to make the and market it. The tire would be ideal for drivers doing a large After extensive research and development, a new tire, the SuperT to produce weather and off-road driving in addition to normal freeway usage. The re opment costs so far have totaled about $10 million. The Superau market beginning this year, and Goodweek expects it to stay on the market foru years. Test marketing costing $5 million has shown that there is a significant ot SuperTread-type tire As a financial analyst at Goodweek Tires, you have been asked by your CFO to evaluate the SuperTread project and provide a recommendation on whether the investment. Except for the initial investment that will occur immediately, o ahed flows will occur at year-end of wo for a total of fo market for Adam Smith that will occur immediately, assume all Goodweek must initially invest $160 million in production equipment to make SuperTread. This equipment can be sold for $65 million at the end of four years. Good intends to sell the SuperTread to two distinct markets: to make th 1. The original equipment manufacturer (OEM) market: The OEM market consists pri of the large automobile companies (like General Motors) that buy tires for new can the OEM market, the SuperTread is expected to sell for $41 per tire. The variable cos to produce each tire is $29 primarily cars. In market: The replacement market consists of all tires purchased after the automobile has left the factory. This market allows higher margins; Goodweek expects to sell the SuperTread for $62 per tire there. Variable costs are the same as in the OEM market. Goodweek Tires intends to raise prices at I percent above the inflation rate; variable cost will also increase at 1 percent above the inflation rate. In addition, the SuperTread project will incur $43 million in marketing and general administration costs the first year. This cost is expected to increase at the inflation rate in the subsequent years. Goodweek's corporate tax rate is 40 percent. Annual inflation is expected to reman constant at 3.25 percent. The company uses a 13.4 percent discount rate to evaluate new product decisions. Automotive industry analysts expect automobile manufacturers to po- duce 6.2 million new cars this year and production to grow at 2.5 percent per year thereafter. Each new car needs four tires (the spare tires are undersized and are in a different categor Goodweek Tires expects the SuperTread to capture 11 percent of the OEM market command CHAPTER 6 Making Capital Investment Decisions 207 dustry analysts estimate that the replacement tire market size will be 32 million tires this that it will gro w at 2 percent annually. Goodweek expects the SuperTread to capture year and an 8 percent market share. The appropriate depreciation schedule for the equipment is the seven-year MACRS depre- ciation schedule. The immediate initial working capital requirement is $9 million. Thereafter, the net working capital requirements will be 15 percent of sales. What are the NPV, payback period, discounted payback period, IRR, and PI on this project