GOODWEEK TIRES, INC. After extensive research and development, Goodweek Tires, Inc., has recently developed a new tire, the SuperTread, and must decide whether to make the investment necessary to produce and market it. The tire would be ideal for drivers doing a large amount of wet weather and off-road driving in addition to normal freeway usage. The research and development costs so far have totaled about $10 million. The SuperTread would be put on the market beginning this year, and Goodweek expects it to stay on the market for a total of four years. Test marketing costing $5 million has shown that there is a significant market for a SuperTread-type Lire. As a financial analyst at Good week Tires, you have been asked by your CFO, Adam Smith, to evaluate the SuperTread project and provide a recommendation on whether to go ahead with the investment. Except for the initial investment that will occur immediately, assume all cash flows will occur at year-end. Goodweek must initially invest $160 million in production equipment to make the SuperTread. This equipment can be sold for $65 million at the end of four years. Goodweek intends to sell the SuperTread to two distinct markets: 1. The original equipment manufacturer (OEM) market: The OEM market consists primarily of the large automobile companies (like General Motors) that buy tires for new ears. In the OEM market, the SuperTrcad is expected to sell for $41 per tire. The variable cost to produce each tire is $29. 2. The replacement 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 1 percent above the inflation rate; variable costs 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 remain 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 produce 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 category). Good week Tires expects the SuperTread to capture 11 percent of the OEM market. Industry analysts estimate that the replacement tire market size will be 32 million tires this year and that it will grow at 2 percent annually. Goodweek expects the SuperTread to capture an 8 percent market share. The appropriate depreciation schedule for the equipment is the seven-year MACRS depreciation 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?

Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.77 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $45,000 feasibility study to analyze the decision to buy the XC-750, resulting in the following estimates: • Marketing: Once the XC-750 is operational next year, the extra capacity is expected to generate $10.05 million per year in additional sales, which will continue for the 10-year life of the machine. • Operations: The disruption caused by the installation will decrease sales by $5.09 million this year. As with Billingham's existing products, the cost of goods for the products produced by the XC-750 is expected to be 72% of their sale price. The increased production will also require increased inventory on hand of $1.11 million during the life of the project, including year 0. • Human Resources: The…

Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.81 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $45,000 feasibility study to analyze the decision to buy the XC-750, resulting in the following estimates: •Marketing: Once the XC-750 is operational next year, the extra capacity is expected to generate $10.05 million per year in additional sales, which will continue for the 10-year life of the machine. • Operations: The disruption caused by the installation will decrease sales by $5.02 million this year. As with Billingham's existing products, the cost of goods for the products produced by the XC-750 is expected to be 73% of their sale price. The increased production will also require increased inventory on hand of $1.07 million during the life of the project, including year 0. •Human Resources: The…

Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.68 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $46,000 feasibility study to analyze the decision to buy the XC-750, resulting in the following estimates: • Marketing: Once the XC-750 is operational next year, the extra capacity is expected to generate $10.20 million per year in additional sales, which will continue for the 10-year life of the machine. Operations: The disruption caused by the installation will decrease sales by $5.01 million this year. As with Billingham's existing products, the cost of goods for the products produced by the XC-750 is expected to be 69% of their sale price. The increased production will also require increased inventory on hand of $1.12 million during the life of the project, including year 0. • Human Resources: The…

GSU Motor Works needs to select an assembly line for producing their new SUV. They have two options:• Option XYZ is a highly automated assembly line that has a large up-front cost but low maintenancecost over the years. This option will cost $114 million today with a yearly operating cost of $40million. The assembly line will last for 6 years and be sold for $48 million in 6 years.• Option GHI is a cheaper alternative with less technology, a longer life, but higher operating costs.This option will cost $168 million today with an annual operating cost of $32 million. Thisassembly line will last for 10 years and be sold for $23 million in 10 years.The firm’s cost of capital is 16%. Assume a tax rate of zero percent. The equivalent annual cost (EAC) for Option XYZ is $_______ million.The equivalent annual cost (EAC) for Option GHI is $_______ million.

Austins cell phone manufacturer wants to upgrade their product mix to encompass an exciting new feature on their cell phone. This would require a new high-tech machine. You are excited about his new project and are recommending the purchase to your board of directors. Here is the information you have compiled in order to complete this recommendation: According to the information, the project will last 10 years and require an initial investment of $800,000, depreciated with straight-line over the life of the project until the final value is zero. The firms tax rate is 30% and the required rate of return is 12%. You believe that the variable cost and sales volume may be as much as 10% higher or lower than the initial estimate. Your boss understands the risks but asks you to explain the alternatives in a brief memo to the board, Write a memo to the Board of Directors objectively weighing out the pros and cons of this project and make your recommendation(s).

Mallette Manufacturing, Inc., produces washing machines, dryers, and dishwashers. Because of increasing competition, Mallette is considering investing in an automated manufacturing system. Since competition is most keen for dishwashers, the production process for this line has been selected for initial evaluation. The automated system for the dishwasher line would replace an existing system (purchased one year ago for 6 million). Although the existing system will be fully depreciated in nine years, it is expected to last another 10 years. The automated system would also have a useful life of 10 years. The existing system is capable of producing 100,000 dishwashers per year. Sales and production data using the existing system are provided by the Accounting Department: All cash expenses with the exception of depreciation, which is 6 per unit. The existing equipment is being depreciated using straight-line with no salvage value considered. The automated system will cost 34 million to purchase, plus an estimated 20 million in software and implementation. (Assume that all investment outlays occur at the beginning of the first year.) If the automated equipment is purchased, the old equipment can be sold for 3 million. The automated system will require fewer parts for production and will produce with less waste. Because of this, the direct material cost per unit will be reduced by 25 percent. Automation will also require fewer support activities, and as a consequence, volume-related overhead will be reduced by 4 per unit and direct fixed overhead (other than depreciation) by 17 per unit. Direct labor is reduced by 60 percent. Assume, for simplicity, that the new investment will be depreciated on a pure straight-line basis for tax purposes with no salvage value. Ignore the half-life convention. The firms cost of capital is 12 percent, but management chooses to use 20 percent as the required rate of return for evaluation of investments. The combined federal and state tax rate is 40 percent. Required: 1. Compute the net present value for the old system and the automated system. Which system would the company choose? 2. Repeat the net present value analysis of Requirement 1, using 12 percent as the discount rate. 3. Upon seeing the projected sales for the old system, the marketing manager commented: Sales of 100,000 units per year cannot be maintained in the current competitive environment for more than one year unless we buy the automated system. The automated system will allow us to compete on the basis of quality and lead time. If we keep the old system, our sales will drop by 10,000 units per year. Repeat the net present value analysis, using this new information and a 12 percent discount rate. 4. An industrial engineer for Mallette noticed that salvage value for the automated equipment had not been included in the analysis. He estimated that the equipment could be sold for 4 million at the end of 10 years. He also estimated that the equipment of the old system would have no salvage value at the end of 10 years. Repeat the net present value analysis using this information, the information in Requirement 3, and a 12 percent discount rate. 5. Given the outcomes of the previous four requirements, comment on the importance of providing accurate inputs for assessing investments in automated manufacturing systems.

Please solve the question below. Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles (who wants to ride on a cloudy day anyway?) The proposed project has the following features; • The firm just spent $300,000 on a marketing study to determine consumer demand (@ t=0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000 and owns it outright (that is, it does not have a mortgage).The land has a current market value of $2,913,027. • The project has an initial cost of $20,000,000 (excluding land, hint: the land is not subject to depreciation). • If the project was undertaken, at t = 0 the company will need to increase its inventories by $3,500,000, accounts receivable by $1,500,000, and its accounts payable by $2,000,000. This net operating working capital will be recovered at the end of the project’s life (t =10). • If the project is undertaken, the…

Buckingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.25 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $50,000 feasibility study to analyze the decision to buy the XC-750, resulting in the following estimates: Marketing: Once the XC-750 is operating next year, the extra capacity is expected to generate $10.5 million per year in additional sales, which will continue for the 10-year life of the machine. Operations: The disruption caused by the installation will decrease sales by $5 million this year (year 0). Once the machine is operating next year, the cost of goods for the products produced by the XC-750 is expected to be 70% of their sale price. The increased production will require additional inventory on hand of $2.0 million, to be added in year 0 and depleted in year 10. Human Resources: The expansion…

You must analyze a potential new product --- a caulking compound that Korry Materials’ R&D people developed for use in the residential construction industry. Korry’s marketing manager thinks they can sell 115,000 tubes per year at a price of $3.25 each for 3 years, after which the product will be obsolete. The required equipment would cost $125,000, plus another $25,000 for shipping and installation. Current assets (receivables and inventories) would increase by $35,000, while current liabilities (accounts payables and accruals) would rise by $15,000. Variable costs would be 60 percent of sales revenue, fixed costs (exclusive of depreciation) would be $70,000 per year, and the fixed assets would be depreciated under MACRS with a 3-year life. When production ceases after 3 years, the equipment should have a market value of $15,000. Korry’s tax rate is 40 percent, and it uses a 10 percent WACC for average risk projects. The R&D costs for the new product were $30,000, and…

Amazon is considering using high capacity drones that would make its product deliveries more efficient. For this project, $116,000 would need to be spent right away to buy the required fleet of drones. The drones will be losing their economic value in equal amount each year, fully over their 6-year economic lives. Once the drones economic life is over, they would all be sold for $8,700 selling price to a new owner, and Amazon would then immediately purchase the same but brand-new drones for the same price as what it paid for the initial fleet of drones. When those drones' life is over, they would again be sold and, again, brand-new ones would be purchased - all for the same prices as for the initial drones, and so on, over and over. Additional information: . .. Amazon expects $9,300 in annual operating costs. All future cash flows are year-end cash flows. Amazon pays 21 percent tax rate on all taxable income. Amazon requires an annual discount rate of 10 percent, and the rate is not…

Amazon is considering using high capacity drones that would make its product deliveries more efficient. For this project, $140,000 would need to be spent right away to buy the required fleet of drones. The drones will be losing their economic value in equal amount each year, fully over their 5-year economic lives. Once the drones' economic life is over, they would all be sold for $10,300 selling price to a new owner, and Amazon would then immediately purchase the same but brand-new drones for the same price as what it paid for the initial fleet of drones. When those drones' life is over, they would again be sold and, again, brand-new ones would be purchased - all for the same prices as for the initial drones, and so on, over and over. Additional information: • Amazon expects $10,100 in annual operating costs. . All future cash flows are year-end cash flows. • Amazon pays 24 percent tax rate on all taxable income. • Amazon requires an annual discount rate of 10 percent, and the rate is…

Your company is considering delivering their own products instead of relying on 3rd party logistics companies to make deliveries for them. If they invest in a fleet of trucks, they estimate that the initial investment for the vehicles will be $200,000. Annual maintenance and gas costs will be approximately $12,000, annual revenues will be $60,000, and the vehicles will be worth a total of about $20,000 at the end of their life. If you expect the vehicles to last for about 10 years and the company has a MARR of ? 15%, what is the present worth of the project?

Solution Summary: The author explains the internal rate of return, NPV, payback period, discount rate, and PI of the project.

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