After extensive research and development, Goodweek Tires, Inc., has...

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After extensive research and development, Goodweek Tires, Inc., has recently developed a new tire, the SuperTread, 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 SuperTread 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 SuperTread-type tire.
As a financial analyst at Goodweek Tires, you have been asked by your CFO, Adam Smith, to evaluate the SuperTread project and provide a 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 $160 million in production equipment to make the SuperTread. This equipment can be sold for $65 million at the end of four years. Goodweek intends to sell the SuperTread to two distinct markets:

1. 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 $41 per tire. The variable cost to produce each tire is $29.

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Research and development $10,000,000 (Sunk cost, so ignored for calculations)\
Test marketing cost $5,000,000 (Sunk cost, so ignored for calculations)\
Initial equipment cost $160,000,000
Equipment salvage value $65,000,000

OEM market:
Price $41
Variable cost $29
Automobile production 6,200,000
Growth rate 2.50%
Market share 11.00%

Replacement market:
Price $62
Variable cost $29 ...

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