Question

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 highway usage. The research and development costs so far have totalled about $10 million. The SuperTread would be put on the market beginning this year end.

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 tire. As a financial analyst at Goodweek Tires, you have been asked by your CFO, Alana Smith, to evaluate the SuperTread project and recommend whether to go ahead with the investment. Except for the initial investment, which will occur immediately, assume all cash flows will occur at year-end. markets: expected to sell for $41 per tire. The variable cost to produce each tire is $29. Variable costs are the same as in the OEM market. general administration costs the first year. This cost is expected to increase at the inflation rate in the subsequent years. category). Goodweek Tires expects the SuperTread to capture 11 percent of the OEM market. working capital requirements will be 15 percent of sales. What is the NPV of this project?

Answer 1

To calculate the NPV of the SuperTread project, we need to determine the cash flows for each year, discount them to their present value, and subtract the initial investment cost.

Step-by-step explanation:

The NPV (Net Present Value) of a project is the difference between the present value of cash inflows and the present value of cash outflows. To calculate the NPV of the SuperTread project, we need to calculate the cash flows for each year and discount them to their present value using an appropriate discount rate.

Given the information provided, we know that the SuperTread tire is expected to be on the market for four years. The selling price per tire is $41, and the variable cost to produce each tire is $29. We also need to take into account the working capital requirements, which are 15% of sales.

Once we have the cash inflows and outflows for each year, we can discount them to their present value and calculate the NPV by subtracting the initial investment cost.