BWFF3053 FINANCIAL MODELLING

Group Assignment
Matrix numbers: _______________
_______________

INSTRUCTIONS

1. The case study must be done in group.

2. Write up to your answers in Excel. You will turn in these answers as soft copy through
UUM’s online learning system. Number your answers accordingly.

3. The DUE DATE is on July 18, 2021 by 10 pm. You will submit your assignment online.
Late submissions will not be entertained.
BWFF3053 FINANCIAL MODELLING
Group Assignment
Matrix numbers: _______________
_______________

CAPITAL BUDGETING: GOODYEAR TIRES, Bhd (15 MARKS)

After extensive research and development, GoodYear Bhd., has recently developed a
new tire, the SuperTread, and must decide whether to make the investment necessary
to produce and market it. The research and development costs so far have totalled
about RM4.5 million. The SuperTread would be put on the market beginning this
year, and GoodYear Bhd expects it to stay on the market for a total of 4 years. Test
marketing costing RM2.25 million has shown that there is a significant market for a
SuperTread-type tire.

As a financial analyst at GoodYear Bhd, you have been asked by your CEO,
Adam Noor, 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.

GoodYear Bhd must initially invest RM63 million in production equipment to

make the SuperTread. This equipment can be sold for RM24.5 million at the end of 4
years. GoodYear Bhd 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 Toyota) that buy tires for new cars.
In the OEM market, the SuperTread is expected to sell for RM171 per tire. The
variable cost to produce each tire is RM100.
2. The replacement market: The replacement market consists of all tires purchased after
the automobile has left the factory. This market allows higher margins; GoodYear
Bhd expects to sell the SuperTread for RM265 per tire there. Variable costs are the
same as in the OEM market.

GoodYear Bhd Tires intends to raise prices by 3 percent annually while variable
costs will also increase by 3 percent annually. In addition, the SuperTread project
will incur RM12 million in marketing and general administration costs the first year.
This cost is expected to increase by 3 percent annually.

GoodYear Bhd's corporate tax rate is 34 percent. The company uses a 12 percent
BWFF3053 FINANCIAL MODELLING
Group Assignment
Matrix numbers: _______________
_______________

discount rate to evaluate new product decisions. Automotive industry analysts expect
automobile manufacturers to produce 500,000 new cars this year and production to
grow at 2.5 percent per year thereafter. Each new car needs four tires (the spare tires
are undersized and are in a different category). GoodYear Bhd expects the
SuperTread to capture 11 percent of the OEM market.

Industry analysts estimate that the replacement tire market size will be 1.4 million
tires this year and that it will grow at 2 percent annually. GoodYear Bhd expects the
SuperTread to capture an 8 percent market share.

The equipment is depreciated as plant and machinery (general) where the

depreciation rates are attached in Appendix A. The immediate initial working capital
requirement is RM4 million, which will be recovered at the end of the project’s life.

1. Prepare 4-year proforma Income Statement for GoodYear Bhd.

2. Prepare proforma Statement of Operating Cashflows

3. What are the NPV, payback period, discounted payback period, IRR, and PI on this
project? Should you take on the project?
BWFF3053 FINANCIAL MODELLING
Group Assignment
Matrix numbers: _______________
_______________

APPENDIX 1: CAPITAL ALLOWANCE, OR DEPRECIATION, RATES IN MALAYSIA

For the purpose of your assignment, initial allowance is incurred in the year of
installation of the machine or at time t=0 while annual allowance rate is incurred at the end of
each year (starting from time t=1).