Calculation of cash flows and investments of Goodwell Company

The calculation of cash flows:

Equipment cost: Goodweek must initially invest $140 million in production equipment to make the Super Tread. This equipment can be sold for $54 million at the end of four years.

Depreciation cost: Modified Accelerated Cost Recovery System (MACRS) method has been used in calculating the depreciation. The calculation are:

year MACRS % Depreciation Book Value

1 0,143 20.020.000 119.980.000

2 0,245 34.300.000 85.680.000

3 0,175 24.500.000 61.180.000

4 0,125 17.500.000 43.680.000

5 0,089 12.460.000 31.220.000

6 0,089 12.460.000 18.760.000

7 0,089 12.460.000 6.300.000

8 0,045 6.300.000 -

Revenue and variable cost: Super Tread has two distinct market, they are the Original Equipment Manufacturer (OEM) and The Replacement market. The selling price at the EOM is $38 per tire, the variable cost to produce each tire is $22. The selling price for the replacement market is $59 per tire and the variable cost is $22. 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. Both selling and variable cost will increase at the rate of 4,25% ( 1% above the inflation rate). Automotive industry expect automobile manufacturers to produce 5,6 million new cars this year and production to grow at 2,5 percent per year thereafter. Goodweek Tires expects the SuperTread to capture 11 percent of the OEM market. Industry analyst estimate that the replacement tire market size will be 14 million tires this year and that it will grow at 2 percent annually. Goodweek expects the SuperTread to capture an 8 percent market share.

EOM Market

The total number of car in EOM market at the first year 5.600.000 unit.

So the number of tires will be:

= 5.600.000 unit * 4

= 22.400.000 units

Total demand for Super Tread in the EOM market at the first year:

= 22.400.000 * 0,11

= 2.464.000 units

year 1 2 3

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