Reference no: EM132437521
Question - Tire Design Capital Investment Analysis
AutoSource, Inc. designs and manufactures tires for automobiles. The company's strategy is to design products that incorporate the full environmental impact of the product over its life cycle. This includes designing tires for ease of recycling and fuel efficiency.
The technical team has determined that the tires manufactured with a silica blend will reduce road resistance. Thus, silica-blended tires will be significantly more fuel-efficient for the consumer without compromising tire life. To produce the silica-blended tires, AutoSource will need to invest $5,000,000 in new equipment. It is expected that the new tire will be attractive to consumers and will result in increased tire sales. However, sales of conventional tires will be reduced as a result of the new silica-blended tires. To evaluate the project, the sales prices and costs of silica-blended and conventional tires are given as follows:
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Silica-Blended Tires
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Conventional Tires
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Sales price per tire
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$160
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$140
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Material cost per tire
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80
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70
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Variable manufacturing cost per tire
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15
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12
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It is anticipated that there will be 80,000 silica-blended tires sold annually, while the sales of conventional tires will be reduced by 70,000 tires annually.
Required -
a. Determine the annual contribution margin for manufacturing and selling the silica-blended tires.
b. Determine the annual cash flows of manufacturing and selling silica-blended tires, incorporating the impact of lost sales from conventional tires.
c. Determine a net present value analysis of the silica equipment investment assuming an eight-year life and 12% minimum rate of return.