CBE6382 - Corporate Financial Management - Finance Management Assignment Help

Assignment Task

Part A
Assume that Tyres Inc., a fictional subsidiary of the aforementioned firm, is considering proceeding with a new investment. That is to produce and market a new type of tyre called SuperTyre.
As a financial analyst, you have been asked by your CFO to evaluate the SuperTyre project and provide a recommendation on whether to go ahead with the investment. Except for the initial investment that will occur immediately (at year 0), assume all cash flows will occur at year-end. Tyres Inc. must initially invest € 400 million in production equipment to make the SuperTyre. This equipment would be sold for €50 million at the end of four years. Tyres Inc. intends to sell the SuperTyre
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 tyres for new cars. In the OEM market, the SuperTyre is expected to sell for €40 per tyre. The variable cost to produce each tyre is €15.
2. The replacement market: The replacement market consists of all tyres purchased after the automobile has left the factory. This market allows higher margins; Tyres Inc. expects to sell the SuperTyre for €45 per tyre there. Variable costs are the same as in the OEM market.
Tyres Inc. intends to raise prices at 4% per year; variable costs will also increase at 4% per year. In addition, the SuperTyre project will incur €30 million in marketing and general administration costs the first year.
This cost is expected to increase at 3% in the subsequent years. Tyres Inc. corporate tax rate is 40%. The company uses a 12% discount rate to evaluate new product decisions.
Automotive industry analysts expect automobile manufacturers to produce 6 million new cars this year and production to grow at 1.5% per year thereafter. Each new car needs four tyres (the spare tyres are undersized and are in a different category). Tyres Inc. expects the SuperTyre to capture 25% of the OEM market. Industry analysts estimate that the replacement tyre markets will be 10 million tyres this year and that it will grow at 2% annually. Tyres Inc. expects the SuperTyre to capture a 15% market share of the replacement market. The appropriate depreciation schedule for the equipment is straight line and the investment will be fully depreciated during the four years period.

You are required:
a) to estimate the NPV and IRR on this project and decide whether to make the investment or not.
b) to re-estimate the profitability of the project by estimating the expected NPV under three different scenarios: The average scenario you estimated in part (a) above, that has 40% probability to be materialized, the optimistic one (30% probability to be materialized), in which the company expects to capture 30% of the OEM market and 20% of the replacement market, and the pessimistic scenario (30% probability) in which the company expects to capture 15% of the OEM market and 10% of the replacement
market.

REQUIREMENTS:
- Students are asked to use current theoretical and empirical academic literature to support the analysis of the above issues.

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