Good Week Tires Case Study Spreadsheets

The data given is Equipment Cost 120,000,000 Useful life 7 Salvage Value of Equipment 51,000,000 at the end of 4 years SuperTread price/unit - OEM market (year 1) 36 SuperTread price/unit - Replacement market (year 1) 59 SuperTread variable cost/unit (year 1) 18 Marketing and Gen. Admin costs (year 1) 25,000,000 Annual inflation rate 3.25% Tax rate 40.00% Discounting Rate 15.90% Total units in OEM Market (year 1) 8,000,000 2 million cars X 4 tires per car OEM Market growth rate 2.50% SuperTread share of OEM market 11.00% Total units in Replacement Market (year 1) 14,000,000 Replacement Market growth rate 2.00% SuperTread share of Replacement market 8.00% Depreciation Schedule (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 4 12.49% 14,988,000 37,488,000 After Tax Salvage Value Book Value at the end of year 4 37,488,000 Sale Price 51,000,000 Gain on Sale 13,512,000 Tax on Gain 5,404,800

 

3.0 CASE ASSUMPTIONS AND ESTIMATION OF CASH FLOW

The calculations of various components of the cash flows and basic assumptions are given below:

3.1 Equipment Cost:

Goodweek has invested $120,000,000 initially in the productionequipment for making the SuperTread.

3.2 Depreciation Cost

: Modified Accelerated Cost Recovery (MACRS) method has been used in calculating the deprecation. The calculation is shown as below:

Year

MACRS %DepreciationEnding Book Value

10.143$17,160,000$102,840,00020.245$29,400,000$73,440,00030.175$21,000,000$52,440,00040.125$15,000,000$37,440,00050.089$10,680,000$26,760,00060.089$10,680,000$16,080,00070.089$10,680,000$5,400,00080.045$5,400,000$0

3.3 Revenues and Variable Cost:

SuperTread has two distinct markets. These are theOriginal Equipment Manufacturer (OEM) market and the replacement market. Theselling prices of the tire are $36 and $59 respectively in OEM and replacement market.For both the market, the variable cost is $18. Both selling price and the variable cost willincrease at the rate of 4.25% (1% above the inflation rate).There will be 2 million newcars in the market. This will grow at the rate of 2.5% in the subsequent years. It isassumed that, SuperTread will capture 11% of the OEM market at the first year. It is alsoestimated that, the replacement market size will be 14 million in the first year. This willgrow at the rate of 2% at the subsequent years. It is expected that, SuperTread willcapture 8% of the replacement market at the first year. The detail calculation of revenueand expenditure for the two markets is shown below:

3.3.1 OEM Market

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