AutoSource Inc. designs and manufactures tires for automobiles. The company’s strategy is to design products that incorporate the full environmental impact of the product over its life cycle. This includes designing tires for fuel efficiency. The technical team has determined that the tires manufactured with a silica blend will reduce road resistance. Thus, silica-blended tires will be significantly more fuel-efficient for the consumer, without compromising tire life. To produce the silica-blended tires, AutoSource will need to invest $5,000,000 in new equipment. It is expected that the new tire will be attractive to consumers and will result in increased tire sales. However, sales of conventional tires will be reduced as a result of the new silica-based tires. To evaluate the project, the cost and prices of silica and conventional tires are estimated as follows: Silica Tires Conventional Tires Sales price per tire $160 $140 Material cost per tire 80 70 Variable manufacturing cost per tire 15 12 It is anticipated that 80,000 silica tires will be sold annually, while the sales of conventional tires will be reduced by 70,000 tires annually. a. Determine the annual contribution margin for manufacturing and selling the silicablended tires. fill in the blank 1 b. Determine the annual cash flows of manufacturing and selling silica-blended tires, incorporating the impact of lost sales from conventional tires. fill in the blank 2 c. Prepare a net present value analysis of the silica equipment investment, assuming an eight-year life and 12% minimum rate of return (use the Present Value tables in Appendix A). Round to the nearest dollar. Present value of annual savings $fill in the blank 3 Less amount to be invested fill in the blank 4 Net present value $fill in the blank 5
Sustainable product capital investment analysis
AutoSource Inc. designs and manufactures tires for automobiles. The company’s strategy is to design products that incorporate the full environmental impact of the product over its life cycle. This includes designing tires for fuel efficiency.
The technical team has determined that the tires manufactured with a silica blend will reduce road resistance. Thus, silica-blended tires will be significantly more fuel-efficient for the consumer, without compromising tire life. To produce the silica-blended tires, AutoSource will need to invest $5,000,000 in new equipment. It is expected that the new tire will be attractive to consumers and will result in increased tire sales. However, sales of conventional tires will be reduced as a result of the new silica-based tires. To evaluate the project, the cost and prices of silica and conventional tires are estimated as follows:
| Silica Tires | Conventional Tires | |
| Sales price per tire | $160 | $140 |
| Material cost per tire | 80 | 70 |
| Variable |
15 | 12 |
It is anticipated that 80,000 silica tires will be sold annually, while the sales of conventional tires will be reduced by 70,000 tires annually.
a. Determine the annual contribution margin for manufacturing and selling the silicablended tires.
fill in the blank 1
b. Determine the annual
fill in the blank 2
c. Prepare a
| Present value of annual savings | $fill in the blank 3 |
| Less amount to be invested | fill in the blank 4 |
| Net present value | $fill in the blank 5 |
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