CASE STUDY ON GOODWEEK TIRES, INC.
1.0 INTRODUCTION
Capital budgeting is the process of identification of opportunities, estimation of cash flow to be generated by the project, evaluating and selecting from among the alternative courses of actions and implementing the investment project with proper follow-up. Hence, Managers must carefully select those projects which promise the greatest future return. How well managers make these capital budgeting decisions is a critical factor in the long run profitability of the company. The case is about the investment decision for producing SuperTread, a new tire of Goodweek Tires, Inc. The report focuses on the Net Present Value (NPV),
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3.2 Depreciation Cost: Modified Accelerated Cost Recovery (MACRS) method has been used in calculating the deprecation. The calculation is shown as below:
|Year |MACRS % |Depreciation |Ending Book |
| | | |Value |
|1 |0.143 |$17,160,000 |$102,840,000 |
|2 |0.245 |$29,400,000 |$73,440,000 |
|3 |0.175 |$21,000,000 |$52,440,000 |
|4 |0.125 |$15,000,000 |$37,440,000 |
|5 |0.089 |$10,680,000 |$26,760,000 |
|6 |0.089 |$10,680,000 |$16,080,000 |
|7 |0.089 |$10,680,000 |$5,400,000 |
|8 |0.045 |$5,400,000 |$0 |
3.3 Revenues and Variable Cost: SuperTread has two distinct markets. These are the Original Equipment Manufacturer (OEM) market and the replacement market. The selling prices of the tire are $36 and $59 respectively in OEM and replacement
Team then commenced to apply some of the budgeting concepts discussed in class. First, NPV was calculated using the NPV function in Excel - approximately $419,000. In this calculation we found NPV to be a positive number thus indicating that the Super Project investment should be pursued by General Foods.
This mini-case provides a review of the methodology and rationale associated with the various capital budgeting evaluation methods such as payback period, discounted payback period, NPV, IRR, MIRR,
Capital planning and budgeting is a very vital piece in the Public Budgeting System process. It is an essential implement in the financial management practice and is effective in both public and private organizations. It is the method which consists of the determination and the evaluation of the investments and the possible expenses by an organization. As explicate by Lee, Johnson, & Joyce (2008), capital budgets help in determining how much of each form of investment is needed, and it supports an organization in assessing the available revenue which includes loans is required to finance those investments (p. 475). Capital budgeting is a central part of the universal
Herelt’s MACRS depreciation for the year of disposition is based on the half-year convention. Thus, 2016 depreciation is $33,546 (50% [$383,600 × 17.49%]).
NPV is known as the best technique in the capital budgeting decisions. There were flows in payback as well as discounted pay back periods because it don’t consider the cash flow after the payback and discounted pay back period. To remove this flows net present value (NPV) method, which relies on discounted cash flow (DCF) techniques is used to find the value of the project by considering the cash flow of the project till its life. To implement this approach, we proceed as
The Modified Accelerated Cost Recovery System is another model of depreiciation. The MACRS is the only approved method to use in the US. Using this method, the depreciation always equals 0. Properly is categorized and then placed in classes. These classes normally determine recovery periods, leaving a year longer to recover. With this method, the rates are tabulated. By using the regular MACRS, the recovery periods will be longer. Straight line can be used in combination with MACRS.
(a) Compute depreciation expense for 2011 and 2012 using (1) the straight-line method, (2) the units-of-activity method, and (3) the double-declining balance method.
These number will be used for predicting future financial statements later in this case study.
Fernandez Corporation purchased a truck at the beginning of 2012 for $54,180. The truck is estimated to have a salvage value of $2,580 and a useful life of 206,400 miles. It was driven 29,670 miles in 2012 and 39,990 miles in 2013. Compute depreciation expense for 2012 and 2013.
AirJet Best Parts Inc. is now considering that the appropriate discount rate for the new machine
Virtually all general managers face capital-budgeting decisions in the course of their careers. Among the most common of these is the either/or choice about a capital investment. The following describes some general guidelines to orient the decision-maker in these situations.
Capital budgeting is the most important management tool that enables managers of the organization to select the investment option that yields comprehensive cash flows and rate of return. For managers availability of capital whether in form of debt or equity is very limited and thus it become imperative for them to invest their limited and most important resource in perfect option that could prove to beneficial for the organization in the long run (Hickman et al, 2013). However, while using capital budgeting tool managers must understand its quantitative and qualitative considerations that are discussed below.
Back in 1898, Frank Seiberling created, The Goodyear Tire and Rubber Company. It is based in Akron, Ohio.
This article mainly discusses the cost of capital, the required return necessary to make a capital budgeting project worthwhile. Cost of capital includes the cost of debt and the cost of equity. Theorist conclude that the cost of capital to the owners of a firm is simply the rate of interest on bonds.
One of the critical problems confronting management and the board of Pioneer Petroleum Corporation was the determination of a minimum acceptable rate of return on new capital investments, The company’s basic capital budgeting approach was to accept all proposed investments with a positive net present value when discounted at the appropriate cost of capital. At issue was how the appropriate discount rate would be determined.