Q.1 UltraMileage Project: After extensive R&D, Apollo Tyres, has recently developed a new tyre, UltraMileage and must decide whether to make the investment necessary to produce and market it. The UltraMileage would be put on the market beginning the current year (2020), and Apollo expects it to stay on the market for a total of ten years. As a financial analyst at Apollo, you have been asked by your CFO to evaluate the UltraMileage 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. In 2020, Apollo must initially invest Rs. 1400 million in production equipment to make the UltraMileage. This equipment can be sold for Rs. 24 million at the end of ten years. Apollo intends to sell the UltraMileage to two distinct markets: The original equipment manufacturer (OEM) market: The OEM market consists primarily of the large automobile companies (like Maruti, Hyundai) that buy tyres for new cars. In the OEM market, the UltraMileage is expected to sell for Rs. 3,800 per unit.

The operational cost to produce each tyre is Rs. 3,200. Automotive industry analysts expect automobile manufacturers to produce 5.6 million new cars in 2021 (with each new car requiring 5 tyres) and production to grow at 2.5 percent per year thereafter.

Apollo expects the UltraMileage to capture 11 percent of the OEM market.

The replacement market: The replacement market consists of all tyres purchased after the automobile has left the factory. This market allows higher margins; Apollo expects to sell the UltraMileage for Rs. 5,900 per tyre in this market. Operational costs are the same as in the OEM market. Industry analysts estimate that the replacement tyre market size will be 14 million tyres in 2021 and that it will grow at 2 percent annually.

Apollo expects the UltraMileage to capture an 8 percent market share.

The selling price and operational cost in both markets are expected to increase by 4% every year. In addition, the UltraMileage project will incur Rs. 26 million in marketing and general

administration costs in the first year. The marketing and general administration cost is expected to increase by 3% in the subsequent years.

The immediate initial working capital requirement is Rs. 900 million. Thereafter, the working capital requirements will be 12 percent of sales. The working capital will be recovered fully at the end of 10 th year. Apollo's corporate tax rate is 35 percent and depreciation will be charged on WDV basis 25%. Prepare the FCF schedule for UltraMileage project. (8 marks)

Q. 2 In recent year, top managers have been given large packages of options, giving them the right to buy stock in the firm at a fixed price. Will these compensation schemes make managers more responsive to stockholders? Why or why not? (4 marks) 

Q. 3 You plan to make a series of deposits in an individual retirement account. You will deposit $1,000 today, $2,000 in two years, and $2,000 in five years. If you withdraw $1,500 in three years and $1,000 in seven years, assuming no withdrawal penalties and all deposits and withdrawals are done at the start of specific year, how much will you have after eight years if the interest rate is 7 percent? (3 marks)