After extensive research and development, ABC Tires, Inc., has recently developed a new tire, the TreadSuper, and has decided to go ahead with the investment necessary to produce and market it$.$ The tire would be ideal for drivers doing a large amount of wet weather and off$-$road driving in addition to normal freeway usage. The research and development costs so far have totaled about $$10$ million. The TreadSuper would be put on the market beginning this year, and ABC expects it to stay on the market for a total of five years. Test marketing $($on which $$5$ million has already been spent$)$ has shown that there is a significant market for a TreadSuper$-$type tire.

As a financial analyst at ABC Tires, you have been asked by your CFO, Mr$.$ Miller, to evaluate the TreadSuper project and provide a recommendation on what will be the increase in business valuation on account of this investment. Except for the initial investment that will occur immediately, assume all cash flows will occur at year$-$end.

ABC must initially invest $$160$ million in production equipment to make the TreadSuper. This equipment can be sold for $$65$ million at the end of four years.

ABC intends to sell the TreadSuper 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 tires for new cars. In the OEM market, the TreadSuper is expected to sell for $$41$ per tire. The variable cost to produce each tire is $$29.$

$2.$ The replacement market: The replacement market consists of all tires purchased after the automobile has left the factory. This market allows higher margins; ABC expects to sell the TreadSuper for $$62$ per tire there. Variable costs are the same as in the OEM market.

$3.$ ABC Tires intends to raise prices at $1$ percent above the inflation rate; variable costs will also increase at $1$ percent above the inflation rate. In addition, the TreadSuper project will incur $$43$ million in marketing and general administration costs the first year. This cost is expected to increase at the inflation rate in the subsequent years.

$4.$ ABC$$s corporate tax rate is $40$ percent. Annual inflation is expected to remain constant at $3\mathrm{.}25$ percent.

$5.$ The company uses a $13\mathrm{.}4$ percent discount rate or interest rate as its Weighted Average Cost of Capital.

$6.$ Automotive industry analysts expect automobile manufacturers to produce $6\mathrm{.}2$ million new cars this year and production to grow at $2\mathrm{.}5$ percent per year thereafter. Each new car needs four tires $($the spare tires are undersized and are in a different category$).$ ABC Tires expects the TreadSuper to capture $11$ percent of the OEM market.

$7.$ Industry analysts estimate that the replacement tire market size will be $32$ million tires this year and that it will grow at $2$ percent annually. ABC expects the TreadSuper to capture an $8$ percent market share.

$8.$ The appropriate depreciation schedule for the equipment is the Reducing balance method schedule.

$9.$ Ignore any taxation impact arising on account of the sale of the equipment at the end of the $4$ year project life.

$10.$ The immediate initial working capital requirement is $$9$ million. Thereafter, the net working capital requirements will be $15$ percent of sales.

$11.$ Assume that the funding is done through equity $($no debt at all$).$

What is the value of the incremental project using the Fundamental Analysis approach? Make suitable assumptions as needed $$ list out the assumptions in your project report.

Hint: Ignore the initial R&D costs and the test marketing costs $$ these costs have already been incurred and are not relevant for this exercise.