Question

Sneaker 2013

1- Summarize the problem and discuss the decision faced by the firm

2- Which project do you think is riskier? How do you think you should incorporate differences in risk into your analysis?

4- What is your final recommendation? Explain in detail

Answer 1

SNEAKER 2013

The cash flow statement for the Sneaker 2013 project has been prepared in the excel spreadsheet. The project will have a life of 6 years from 2013 to 2018. The cash flow statement is shown below:

SNEAKER 2013 PROJECT ANALYSIS
	2012	2013	2014	2015	2016	2017	2018
Year	0	1	2	3	4	5	6
Suggested Retail Price		$      190	$      190	$      190	$      190	$            190	$      190
Net Retail Price		$      115	$      115	$      115	$      115	$            115	$      115
Estimated Sales Volumes (millions)		1.2	1.6	1.4	2.4	1.8	0.9
Sales Revenue		$      138	$      184	$      161	$      276	$            207	$      104
Lost Sales (Cannibalization)		21	9
Net Revenues		$      117	$      175	$      161	$      276	$            207	$      104
Factory Outlay	150
MACRS Rates for Factory		2.50%	5%	4.70%	4.50%	4.30%	4%
Factory Depreciation		3.75	7.5	7.05	6.75	6.45	6
Factory Salvage Value							102
Equipment Cost	15
Freight & Installation	5
Total Equipment Cost	20
MACRS Rates for Equipment		20%	32%	19%	12%	11%	6%
Depreciation of Equipment		4	6.4	3.8	2.4	2.2	1.2
Equipment Salvage Value							3
Variable Costs (55% of revenues)		$   64.35	$   96.25	$   88.55	$ 151.80	$       113.85	$   56.93
Working Capital Requirements:
Inventory	15	$   16.09
Payables	5	$   12.87
Receivables	0	$     9.36
Working Capital Invested	10	$   12.58
Incremental working Capital	10	-$     2.58
Working Capital Recovered							-$     7.42
Endorsement Fees to Kirani James		2	2	2	2	2	$     2.00
Olympic Bonus in 2016					1
SG&A expenses per year		7	7	7	7	7	7
A&P expenses per year		25	15	10	30	25	15
Total Operating Expenses	160	$ 108.68	$ 134.15	$ 118.40	$ 200.95	$       156.50	-$     9.45
Income Before Taxes	160	$     8.32	$   40.85	$   42.60	$   75.05	$         50.50	$ 112.95
Less Taxes at 40%		$     3.33	$   16.34	$   17.04	$   30.02	$         20.20	$   45.18
Income after taxes		$     4.99	$   24.51	$   25.56	$   45.03	$         30.30	$   67.77
Add back: Non Cash Charges
Factory Depreciation		3.75	7.5	7.05	6.75	6.45	6
Equipment Depreciation		4	6.4	3.8	2.4	2.2	1.2
Net Cash Flow	-160	$   12.74	$   38.41	$   36.41	$   54.18	$         38.95	$   74.97

The research and development costs have not been incorporated in the above cash flow calculations because these are sunk costs. The annual interest costs have also not been considered in the above cash flow calculations because the cost of capital has the built in effect of cost of debt. The endorsement fees and the 2016 bonus have been incorporated in the above cash flows. The net revenues are equal to gross margins less the cannibalized sales.

The payback period for the Sneaker 2013 project is 4.53 years. Its internal rate of return is 12% which is higher than the 11% cost of capital and thus the project has a positive net present value of $ 8.17 million. Therefore, the project is viable from the quantitative standpoint. If Michelle Rodriguez invests in this project then it would increase the wealth of all the shareholders of New Balance Company. The computations have been performed in excel spreadsheet. The outputs are shown in the table below:

Years	0	1	2	3	4	5	6
Payback Period		-$ 147.26	-$ 108.85	-$   72.44	-$   18.26	$         20.69	$   95.66
Payback Period	4.53	Years
Internal Rate of Return	12%
NPV @ 11%	$8.17

Produce the cash flow statement for the Persistence project clearly showing all the assumptions and supporting calculations including the initial investment outlay and the net cash flows during each year of the project. Note that for Persistence project sales and revenue mean the same thing. (25 points)

The cash flow statement for the Persistence project has been prepared in the excel spreadsheet. The project will have a life of 3 years from 2013 to 2015. The cash flow statement is shown below:

PERSISTENCE PROJECT ANALYSIS
	2012	2013	2014	2015
Years	0	1	2	3
Wholesale Price		90	90	90