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Mini Case: Goodweek Tires, Inc.

Assumptions

PP&E Investment 120,000,000

Useful life of PP&E Investment (years) 7

Salvage Value of PP&E Investment 60,000,000

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 (S&P 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

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