After extensive research and development, Gooday Tyres Ltd. has recently developed a new tyre, SuperSpeed, and must decide whether to make the investment necessary to produce and market it. The tyre would be ideal for drivers doing a large amount of wet weather and off-road driving in addition to normal motorway usage. The research and development costs so far have totalled about $10 million. Gooday is considering putting the SuperSpeed tyres on the market at beginning this year and is expected to stay on the market for four years. Test marketing costing $5 million has shown that there is a significant market for SuperSpeed type tyres.

As a financial analyst at Gooday Tyres, you have been asked by your CFO, Char-Le Wang, to evaluate the SuperSpeed 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.

Gooday must initially invest $140 million in production equipment to make SuperSpeed tyres. The equipment will be fully depreciated on a straight line basis over 5 years. This equipment can be sold for $54 million at the end of four years. Gooday intends to sell SuperSpeed tyres to two markets:

1. The original equipment manufacturer (OEM) market: the OEM market consists primarily of large car manufacturers (like General Motors, Ford and Toyota) that buy tyres for new cars. In the OEM market, each SuperSpeed type is expected to be sold at unit price of $38. The variable cost to produce each tyre is $22.

2. The replacement market: the replacement market consists of all tyres purchased after newly manufactured vehicles have left the factory. This market yields higher margins. Gooday expects to sell a SuperSpeed tyre at $59 unit price there. The variable cost is the same as the OEM market.

In addition, SuperSpeed will incur $26 million in marketing and general administration costs each year. Assume the unit price, variable costs and marketing and general administration costs are forecast to remain constant in real terms.

Goodays corporate tax rate is 28 percent. The company uses a 16 percent discount rate to evaluate new product decisions. Vehicle industry analysts expect vehicle manufacturers to produce 5.6 million new cars this year and production to grow at 2.5 percent per year thereafter. Each new car needs four tyres (the spare tyres are undersized and are in a different category). Gooday expects SuperSpeed to capture 11 percent of the OEM market.

Industry analysts estimate that the replacement tyre market size will be 14 million tyres this year and it will grow at 2 percent annually. Gooday expects SuperSpeed to capture 8 percent market share.

The immediate initial working capital requirement is $9 million. Thereafter, the net working capital (NWC) requirements will be 15 percent of sales. The NWC will be built up in the year prior to the sales.

Calculate the payback period, profitability index, net present value and internal rate of return for this project and provide a recommendation on whether to go ahead with the investment