Reference no: EM131887836

After extensive research and development (research and development costs so far have totaled about $10 million), Reifen, Inc., has recently developed a new tire, the Steuernass, 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 driving. The Steuernass would be put on the market beginning this year, and Reifen 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 this wet weather tire. As a financial analyst at Reifen, you have been asked by your CFO, Anja Unternehmen, to evaluate the Steuernass 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. Reifen must initially invest $94 million in production equipment to make the Steuernass. This equipment can be sold for $24 million at the end of four years. The appropriate depreciation schedule for the equipment is straight-line to zero over five years. Reifen intends to sell the Steuernass in two distinct markets: (1) The Original Equipment Manufacturer, OEM, market consists primarily of the large automobile companies (BMW and Volkswagen) that buy tires for new cars. In the OEM market, the Steuernass is expected to sell for $38 per tire. The variable cost to produce each tire is $26 in the first year. (2) The replacement market consists of all tires purchased after the automobile has left the factory. This market allows higher margins; Reifen expects to sell the Steuernass for $59 per tire there. Variable costs are the same as in the OEM market. Reifen’s variable costs will rise by 3.50% and it will raise prices on the Steuernass by 3.50% each year. The Steuernass project will incur $31 million in marketing and general administration costs the first year and this cost is expected rise by 3.50% per year.Reifen's corporate tax rate is 53%. The company uses a 12% discount rate to evaluate new product decisions. Automotive industry analysts expect these automobile manufacturers to produce 4.1 million new cars this year and production to grow at 4% per year thereafter. Each new car needs four tires (spare tires are undersized and are in a different category). Reifen expects the Steuernass to capture 16% of the OEM market. Industry analysts estimate that the replacement tire market size will be 9 million tires this year and that it will grow at 2% annually. Reifen expects the Steuernass to capture an 11% market share. The immediate initial working capital requirement is $9 million. Thereafter, the net working capital requirements will be 15% of the current year’s sales. Calculate NPV and IRR. and determine if project should be pursued