Goodweek Tires, Inc.

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| Goodweek Tires, Inc. | A Case Study | | | | | Table of Contents: * Case Overview * Project Information * Capital Budgeting Analytical Measures * Forecasted Sales Numbers * Depreciation Schedule * Investment Cash Flows * Recommendation & Conclusion GOODWEEK TIRES INC. Case Overview Goodweek Tires, Inc. recently developed a new tire, SuperTread. This tire was meant to be ideal for drivers who do a lot of wet weather, off-roading, and normal freeway driving. The company must decide whether or not to make an investment to produce the product and market it. As a financial analyst at Goodweek Tires, I was asked to evaluate the SuperTread project by CFO, Adam Smith. I was asked to review the…show more content…
The IRR provides a single number that summarizes the merits of a project. If the IRR is greater than the discount rate the project will be accepted and rejected if it is lower. The pros of the IRR are that it summarizes the information about a project in a single rate of return and gives people a simple way of discussing projects. Yet, the IRR ignores issues of scale. Another variant to the NPV that I used was the modified IRR method. It is a function of the discount rate. The MIRR handles the multiple IRR problems by combining cash flows until only one change in sign remains. The last technique used to evaluate this project was the profitability index. The PI is the ratio of the present value of the future expected cash flows after the initial investment divided by the amount of the initial investment. Although, the PI also has a scale problem, it can be corrected using incremental analysis. The profitability index does not work if funds are limited further than the initial time period. While the PI is good at handling capital rationing, it cannot handle capital rationing over many time periods. Forecasted Sales Numbers In order to find the initial outlay for Goodweek Tires, we had to analyze the cost of the asset and determine if there were any shipping or installation fees. After determining that the cost of the asset would be $140,000,000 and there were no other fees, we added the cost of net working capital of $9,000,000 to that number to come up

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