Fin322

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FIN322 Advanced Business Finance
Major Assignment
Spring 2012

Due Date: By 4pm on 8 Oct 2012 (Monday in Session Week 11)

Place for
Submission: A hard copy of the assignment should be placed in the assignment box outside the front-office of the School of Accounting and Finance located in level 3, building 40. This box will be removed at 4 pm on the due day.

A soft copy should be sent to your tutor by email by the due date.

Penalty for
Late Submission: Any assignment received after that time will be penalised by a deduction of 20% for each day late (or part thereof). Any late assignment should be submitted to the subject coordinator directly.

Format:A written submission is required from each group of students, showing all relevant working and formulae. Nature:1).This is a group assignment. Each group will consist of up to three students and each group will submit one joint report. Group members are expected to actively discuss and work among themselves but not refer to the work of any other groups. Any collusion of this form will be treated seriously and penalised. 2). Please ensure that each member in a group makes an equal contribution to the assignment, as far as possible. Free riders should be reported to me and may be penalised. Reference:In doing this assignment, you are encouraged to refer to the texts, the papers in the reference lists at the end of the chapters and any other material that may assist you in understanding what you are doing in this assignment. Ensure that you give adequate cross references to the sources from which you have gathered information in compiling your report.

Marking Criteria: The criteria used in assessing your marks on this assignment will include: Computational accuracy,
Relevance and accuracy of the interpretation of results, Demonstration of your understanding of the underlying theory, Appropriate analyses,
Neatness and appropriate style of report presentation.

Copies:Students should retain a copy of the assignment.
Weighting:15% of the assessment for FIN322.
TOM Tyres, Inc. Proposal

Background

TOM Tyres, Inc. is a large-scale company manufacturing tyres in the United States. After extensive research and development, TOM Tyres, Inc., has recently developed a new tyre, the SuperTread, 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 freeway usage. The research and development costs so far have totalled about $10 million. The SuperTread would be put on the market beginning this year, and TOM expects it to stay on the market for a total of four years. Test marking costing $5 million has shown that there is a significant market for a SuperTread-type tyre. TOM Tyres has manufacturing and distribution facilities in the States, Canada and Asia.

As a financial Director at TOM Tyres, James Lee has been asked by the Board of directors to evaluate the SuperTread project and provide a recommendation on whether to go ahead with the investment. He was concerned with the discount rates used in the analysis, as well as various comments he had received from other executives at TOM Tyres whom he had asked to review the proposal.

Except for the initial investment that will occur immediately, assume all cash flows will occur at year-end. TOM Tyres must initially invest $120 million in production equipment to make the SuperTread. This equipment can be sold for $51 million at the end of four years. TOM Tyres intends to sell the SupperTread to two distinct markets.

1) The original equipment manufacturer (OEM) market. The OEM market consists primary of the large automobile companies (like General Motors) that buy tyres for new cars. In the OEM market, the...
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