View the step-by-step solution to:


Mini Case


Goodtime Rubber Co. Ltd. is a Taiwan tire and tube

manufacturer with its factory located in Vietnam. Goodtime's products obtained ISO-

9001 certification. Assume that Goodtime has recently developed a new model of scooter tire after extensive research and development

and that the research and development costs have totaled about $20 million. A $5 million market testing expenses has also spent and

proved that there is a significant market for the new model. The new model will be put into the market this year and is expected to stay in

the market for four years.

As a financial analyst of Goodtime, you have to evaluate and provide recommendation on whether to go ahead with the investment. Except

for the initial investment that will occur immediately, all cash flows will occur at year end. To make the new model, Goodtime has to

initially invest $150 million in production equipment. The equipment can be sold for $50 million at the end of four years. Goodtime can

sell the new model to two distinct markets:

1. Original manufacturer market—this market consists primarily of the large automobile companies that buy tires for new cars. The

new model is expected to sell for $40 per tire, and the variable cost of each tire is $25.

2. Replacement market—this market consists of all tires purchased after the automobile has left the factory. The new model in this

market is expected to sell for $50 per tire, and the variable cost of each tire is $25 which is the same as that in the original

manufacturer market.

The project will incur $25 million in marketing and general administrative costs the first year, and this cost is expected to increase at the

inflation rate in subsequent years. Goodtime also intends to raise the selling price of the new tire at the inflation rate. The annual inflation

rate is expected to remain constant at 3.5 percent. Variable costs are expected to increase at 1 percent above the inflation rate.

Automobile analysts expect automobile manufacturers will produce 5.5 million new cars this year and production will grow at 2.5 percent

per year thereafter. Each new car needs four tires. Goodtime expects the new model will capture 10 percent of the original manufacturer


Analysts also estimate that the replacement market size will be 15 million tires this year and that it will grow at 2 percent annually.

Goodtime expects the new model will capture 8 percent market share.

The equipment will be depreciated on a seven-year MACRS schedule. The immediate initial working capital requirement is $10 million,

and the net working capital requirements will be 15 percent of sales. Goodtime's corporate tax rate is 40 percent and its required return is

15 percent.


What are the NPV, payback period, IRR, and PI of this investment project?

Recently Asked Questions

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.


Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes