Ch7CaseSlutions.docVIP

Mini Case: Goodweek Tires, Inc. Assumptions PPE Investment 120,000,000 Useful life of PPE Investment (years) 7 Salvage Value of PPE Investment 51,428,571 Annual Depreciation Expense (7 year MACRS) Ending Book Year MACRS % Depreciation Value 1 14.29% 17,148,000 102,852,000 2 24.49% 29,388,000 73,464,000 3 17.49% 20,988,000 52,476,000 Last year of project 4 12.49% 14,988,000 37,488,000 5 8.93% 10,716,000 26,772,000 6 8.93% 10,716,000 16,056,000 7 8.93% 10,716,000 5,340,000 8 4.45% 5,340,000 0 SuperTread price/unit in OEM market (year 1) 36.00 SuperTread price/unit in Replacement market (year 1) 59.00 SuperTread cost/unit (year 1) 18.00 Year 1 marketing and admin costs 25,000,000 Annual inflation rate 3.25% Corporate Tax rate 40.00% Beta (1/24/97 Valueline) 1.30 Rf (30 year U.S. Treasury Bond) 5.50% Rm (SP 500 30 year average) 13.50% Re (from CAPM) Re= Rf+ (e[ RM - Rf ] = 0.055 + 1.3[ 0.135 - 0.055 ] = 15.90% 15.90% Year 1 OEM Market for SuperTread (2 million new cars x 4 tires/car) 8,000,000 OEM Market growth 2.50% SuperTread share of OEM market 11.00% Year 1 Replacement Market for SuperTread 14,000,000 Replacement Market growth 2.00% SuperTread share of Replacement market 8.00% Year 0 1 2 3 4 Sales OEM Market Units 880,000 902,000 924,550 947,664 Price 36.00 37.53 39.13 40.79 Total OEM Market 31,680,000 33,852,060 36,173,042 38,653,156 Replacement Market Units 1,120,000 1,142,400 1,165,248 1,188,553 Price 59.00 61.51 64.12 66.85 Total Replacement Market 66,080,000 70,266,168 74,717,530 79,450,885 Total Sales 97,760,000 104,118,228 110,890,572 118,104,041 Variable Costs Units (OEM + Replacement) 2,000,000 2,044,400 2,089,798 2,136,217 Cost 18.00 18.