Instructor: V Hng c

Group members:
T Khnh Linh
Trn Thanh Mai
L Vn Minh
Trn Nguyn Nht Minh
1
 1. SUMMARY

2. DATA
ANALYSIS 3. INCREMENTAL CF

4. ANSWER THE QUESTIONS

2
The Goodweek Tires, Inc - A tire producing company
Brand new SuperTreat tire
product
Function be ideal for the wet weather and off road driving in addition to normal
freeway usage
Sold in two In the OEM market expected price of $41 per tire
different variable cost is $29 per tire
markets captures 11% shares of this market
In the replacement market expected price of $62/ tire
variable cost is $29 per tire
captures 8% shares of this market

Both selling and variable cost 1% above the inflation rate (3.25%).

Initial working capital of $9 million

Net working capital will be 15% of sales.

13.4% discount rate to evaluate the new product decision

The corporate tax rate of the industry is 40%.
 Sunk cost:

Research and development costs: $10 million

Testing market costs: $5 million

A. The original equipment manufacture (OEM) Market

Growth rate per year: 2.5%

Cars produced next year = Cars produced this year*(1 + 2.5%)
Each new car needs 4 tires. SuperTread will capture 11%
of the OEM market
Sales unit = Car produced*4*11%
The cost and sell price of tire will also increase 1% above
the inflation rate:
Price per tire next year = Price per tire this year*( 1+ 4.25%)
Cost per tire next year = Price per tire this year*(1 + 4.25%)
 New cars production this year: 6.2 million
Sell price: $41/tire
Variable cost: $29/tire
Number of tires needed: 6,200,000*4 = 24,800,000
Total demand for SuperTread in the OEM market at the
first year:
24,800,000*0.11 =2,728,000
Revenues:
2,728,000*$41 = $111,848,000
Cost:
2,728,000*$29 = $79,112,000
 Year 1 2 3 4

Sales Unit 2,728,000 2,796,200 2,866,105 2,937,757

Price $41 $42.74 $44.56 $46.45

Sales Revenue $111,848,000 $119,516,579 $127,710,934 $136,467,115

Variable
$29 $30.23 $31.52 $32.86
cost/Unit

Variable cost $79,112,000 $84,536,116 $90,332,124 $96,525,520

 Growth rate: 2% annually
Tires demandnext year = Tires demandthis year *( 1+ 2%)

SuperTread will capture 8% of the market share:

Sales unit = Tires demand * 8%

Both of price and cost will rise by 1% each year:

Price per tirenext year = Price per tirethis year*( 1+ 4.25%)
Cost per tirenext year = Price per tirethis year*(1 + 4.25%)
First year:
Price: $62/tire
Cost: $29/tire
Market size: 32 million tire
 Year 1 2 3 4

Sales Unit 2,560,000 2,611,200 2,663,424 2,716,692.48

Price $62 $64.635 $67.382 $70.2457

Sales Revenue $158,720,000 $168,774,912 $179,466,802.675 $190,836,024.6

Variable
$29 $30.2325 $31.52 $32.86
Cost/Unit

Variable Cost $74,240,000 $78,943,104 $83,944,149.638 $89,262,011.52

C. Total revenue and variable cost

Year 1 2 3 4

Total Sales Unit 5,288,000 5,407,400 5,529,529 5,654,450.105

Total Sales
$270,568,000 $288,291,490 $307,177,736 $327,303,139
Revenue

Total Variable
$153,352,000 $163,479,220 $174,276,273 $185,787,531
Cost
 Sales revenue

Operating costs

Tax

Operating cash flow

Total cash flow of Invesment

Total cash flow of Project

 Worksheet for Cash flows of Goodweek Tires, Inc.

Year 0 Year 1 Year 2 Year 3 Year 4

Invesments:

(1) Equipment
- 160,000,000 58,993,600
(2) Accumulated
depreciation 22,864,000 62,048,000 90,032,000 110,016,000

(3) Adjusted basis

of machine after 49,984,000
depreciation (end
137,136,000 97,952,000 69,968,000
of year)
(4) Networking
capital 9,000,000 40,585,200 43,243,723.575 46,076,660
(5) Change in net
working capital -9,000,000 -31,585,200 -2,658,523 -2,832,936 46,076,660

(6) Total cash flow

of invesment -169,000,000 -31,585,200 -2,658,523 -2,832,936 105,070,260
 Worksheet for Cash flows of Goodweek Tires, Inc.

Year 0 Year 1 Year 2 Year 3 Year 4

Income

(7) Sales revenue

270,568,000 288,291,490 307,177,736 327,303,139
(8) Operating costs
-153,352,000 -163,479,220 -174,276,273 -185,787,531

(9) Marketing &

General -43,000,000 -44,397,500 -45,840,418 -47,330,232
Administration costs
(9) Depreciation
-22,864,000 -39,184,000 -27,984,000 -19,984,000
(10) Income before
tax 51,352,000 41,230,770 59,077,044 74,201,375
(11) Tax at 40%
-20,540,800 -16,492,308 -23,630,817 -29,680,550
(12) Net income
30,811,200 24,738,462 35,446,226 44,520,825
 Incremental Cash Flows for the Goodweek Tires, Inc.

Year 0 Year 1 Year 2 Year 3 Year 4

(1) Sales revenue

270,568,000 288,291,491 307,177,737 327,303,139
(2) Operating costs
153,352,000 -163,479,221 -174,276,274 -185,787,532

(3) Marketing &

General Administration
costs -43,000,000 -44,397,500 -45,840,419 -47,330,232

(4) Tax
-20,540,800 -16,492,308 -23,630,818 -29,680,550
(5) Cash flow from
operations
[(1)+(2)+(3)+(4)] 53,675,200 63,922,462 63,430,227 64,504,825

(6) Total cash flow of

invesment
169,000,000 31,585,200 2,658,524 -2,832,937 105,070,260

(7) Total cash flow of

project [(5)+(6)]
-169,000,000 22,090,000 61,272,049 60,588,601 174,970,230
 Year 0 Year 1 Year 2 Year 3 Year 4

Total cash flow

of project -169,000,000 22,090,000 61,272,049 60,588,601 174,970,230

r = 13.4%
22,090,000 61,272,049 60,588,601 174,970,230
NPV= -169,000,000 + 1.134 + 1.1342 + 1.1343 + 1.1344 = 45,481,357
NPV > 0 Accepted
 Year 0 Year 1 Year 2 Year 3 Year 4

Total cash flow

of project -169,000,000 22,090,000 61,272,049 60,588,601 174,970,230

Accumulated
-169,000,000 -146,910,000 -85,637,951 -25,049,349 149,920,880
cash flow

,,
Payback period = + =3+ = 3.14 (years)
,,
A: the last period with a negative cumulative cash flow;
B: the absolute value of cumulative cash flow at the end
of the period A;
C: the total cash flow during the period after A
 Year 0 Year 1 Year 2 Year 3 Year 4
174,970,23
CF -169,000,000 22,090,000 61,272,049 60,588,601
0
Present value
factor 1.00 0.88 0.78 0.69 0.60
PV=1/(1+i)n
Discounted cash 105,806,40
-169,000,000 19,479,718 47,647,080 41,548,157
flow (CFPV) 2
Cumulative
Discounted cash -169,000,000 -149,520,282 -101,873,202 -60,325,045 45,481,357
flow
,,
Discounted payback period = + ==+ = 3.57 (years)
,,

A = Last period with a negative discounted cumulative cash flow;

B = Absolute value of discounted cumulative cash flow at the end of the period A;

C = Discounted cash flow during the period after A. 17

 22,090,000 61,272,049
NPV= -169,000,000 + + +
(1+) (1+)2
60,588,601 174,970,230
+ =0
(1+)3 (1+)4
IRR 0.22 22%

IRR > r Accept

An index that attempts to identify the relationship
between the costs and benefits of a proposed project

PI =


=1+

45,481,357
=1+ = 1.27
160,000,000+9,000,000
20