Description
Dear Albers MBA candidate, Congratulations! I am pleased to offer you the position as
a financial analyst at Awesome Redhawk Business Consulting LLC! During your tenure
(this academic quarter), you and your team (you will be allowed to work in groups on
this project. A group can have at most two members) will be assigned with two projects!
One is a capital budget project and the other is a financial analysis project. You may
find details of the projects below. Project One: As a financial analyst at ARBC
(Awesome Redhawk Business Consulting), you help your clients make different capital
budget decisions. Your first client is Goodweek Tires, and you may find detailed case
des?r?ption below: “After extensive research and development, Goodweek Tires, Inc has
recently developed a new tire, the Super Tread, 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
Super Tread 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 Super Tread – type tire. As a financial
analyst, you have been asked by the CFO, Adam Smith, to evaluate the Super Tread
project and provide 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 $120 million in production
equipment to make the Super Tread. This equipment can be sold for $51 million at the
end of four years. Goodweek intends to sell the Super Tread to two distinct markets: •
The original equipment manufacturer (OEM) market: The OEM market consists
primarily of the large automobile companies (Like General Motors) that buy tires for new
cars. In the OEM market, the SuperTread is expected to sell for $36 per tire. The
variable cost to produce each tire is $18. • 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 $59 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 $25 million
in marketing and general administration costs the first year. This costs is expected to
increase at the inflation rate in the subsequent years. Goodweek’s corporate tax rate is
21 percent. Annual inflation is expected to remain constant at 3.25 percent. The
company uses a 15.9 percent discount rate to evaluate new product decisions.
Automotive industry expect automobile manufacturers to produce 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 different category). Goodweek Tires
expects the SuperTread to capture 11 percent of the OEM market. Industry analyst
estimate that the replacement tire market size will be 16 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 (MACRS table attached below). The
immediate initial working capital requirement is $11 million. Thereafter, the net working
capital requirements will be 15 percent of sales. ” MACRS from IRS.gov 1 2 3 4 5 6 7 8
14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46% You need to answer the
following questions for your client: 1. What is the NPV of this project? 2. What is the IRR
of this project? 3. What are the NPVs and IRRs under best- and worst-case scenario?
(treat all the inputs provided as base case information, you need to make your own
assumption for numbers used in the best- and worst-case scenario. Your assumptions
should make economic sense. Please clearly discuss those assumptions (risk factors)
in your written report and label those assumption in the Excel spreadsheet.) 4. Perform
sensitivity analysis on prices and market shares (for both OEM and RM). Which market
is more important to Goodweek Tires? 5. Provide additional risk analysis if you feel
necessary. 6. What is your recommendation to Goodweek Tires? (A few notes: All of
your calculations should be computed in Excel and should be well organized and
labeled. Turn in your Excel spreadsheet as well as the Word report via the link in
Canvas.)