Goodweek Tires

After reading the Goodweek Tires Inc. case, I have learned that research and development costs so far have totaled $10 million, Goodweek expects the Super Tread to stay on the market for 4 years and test marketing will cost $5 million. The company will also need to invest around $120 million for production equipment. The salvage value of the said equipment will be $51,428,571 after 4 years and will have a 7 year useful life. In the Original Equipment Manufacturer market, the tires are expected to sell for $36 a tire. Variable costs per tire will reach $18. The company also has intent to raise both its selling and variable cost at 1% above the inflation rate. This project will also require an initial working capital of $11 million and after that net working capital will be 15% of sales. It will also incur $25 million in marketing and general administration cost for the first year. In the next subsequent years, this figure is expected to increase at the inflation rate.

Net Present Value

This refers the excess of present value of future cash flows from a project over the present value of investment for the same. It is one of the most reliable measures used in capital budgeting because it accounts for time value of money by using discounted cash inflows. The formula is as follows:

After using an excel worksheet, I have computed that the NPV of the project is: -$8,291,026.

Payback Period

This refers to the length of time that is needed to recover the cost of an investment. This can be calculated by dividing the cost of the project by annual cash inflows.

Payback period = Cost of Project / Annual Cash Inflows

Since this project has an uneven cash flow the payback period can be determined as follows:

Year | 1 | 2 | 3 | 4 |

Opening Balance | 131,000,000 | 105,744,000 | 70,972,197 | 37,573,569 |

Cash Flow | 25,256,000 | 34,771,803 | 33,398,628 | 96,679,108 |

End Balance | 105,744,000 | 70,972,197 | 37,573,569 | |

Payback Period = 3 +...