Goodweek Tires, Inc.
| Goodweek Tires, Inc. | A Case Study | | | |
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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 information and provide a recommendation on whether to go ahead with the investment.
Before reviewing all of the information there were some keys points that needed to be kept in mind when deciding whether to accept or reject the project. First, sunk costs are costs that already occurred and therefore are not incremental cash outflows. Yet, both opportunity costs and side affects must be considered. Also, erosion occurs when a new product reduces the sales and the cash flows of already existing products. However, synergy happens when a new project increases the cash flows of the project that already exists. Inflation also must be handled consistently. It must convey both the discount rate and cash flows in nominal terms or in real terms, using the simpler method.
I was provided with the following information:
Project Information
Research and Development = $10 million
4 year project life
Already completed test marketing = $5 million
Initial Investment = $140 million
Salvage Value after 4 years = $54 million
Variable Cost of tire = $22 per tire for OEM
Sell for = $38 per tire for OEM
Variable Cost of tire = $22 per tire for Replacement
Sell for = $59 per tire for Replacement
Marketing and General Administration Costs = $26 million
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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 information and provide a recommendation on whether to go ahead with the investment.
Before reviewing all of the information there were some keys points that needed to be kept in mind when deciding whether to accept or reject the project. First, sunk costs are costs that already occurred and therefore are not incremental cash outflows. Yet, both opportunity costs and side affects must be considered. Also, erosion occurs when a new product reduces the sales and the cash flows of already existing products. However, synergy happens when a new project increases the cash flows of the project that already exists. Inflation also must be handled consistently. It must convey both the discount rate and cash flows in nominal terms or in real terms, using the simpler method.
I was provided with the following information:
Project Information
Research and Development = $10 million
4 year project life
Already completed test marketing = $5 million
Initial Investment = $140 million
Salvage Value after 4 years = $54 million
Variable Cost of tire = $22 per tire for OEM
Sell for = $38 per tire for OEM
Variable Cost of tire = $22 per tire for Replacement
Sell for = $59 per tire for Replacement
Marketing and General Administration Costs = $26 million