Question

Sneaker 2013 case study

1. Summarize the problem and discuss the decision faced by the firm
2. Assuming the following cashflows

T	0	1	2	3	4	5	6
CF	(180)	9.5	29.7	37.3	41.8	46.4	146.6
Discount rate	11%

Find Payback period, discounted payback period, NPV, PI, and IRR

4. What is your final recommendation? Explain in detail.

Answer 1

Payback period formula = Years before recovery + Cost not covered in that year/ Cash flow for that year
=5+(180-9.5-29.7-37.3-41.80-46.4)/146.60 =5.10 years

Discounted Cash Flow Year 1 =9.5/(1+11%) =8.5586
Discounted Cash Flow Year 2 =29.7/(1+11%)^2 =24.1052
Discounted Cash Flow Year 3 =37.30/(1+11%)^3=27.2734
Discounted Cash Flow Year 4 =41.80/(1+11%)^4=27.5350
Discounted Cash Flow Year 5 =46.40/(1+11%)^5=27.5361
Discounted Cash Flow Year 6 =146.60/(1+11%)^6=78.3783

Discounted Payback Period =5+(180-8.5586-24.1052-27.2734-26.5350-27.5361)/78.3783 =5.84 years

NPV =PV of Cash Flows -Initial Investment =9.5/(1+11%)+29.7/(1+11%)^2+37.3/(1+11%)^3+41.8/(1+11%)^4+46.4/(1+11%)^5+146.6/(1+11%)^6-180 =13.39

PI =1+NPV/Investment =1+13.39/180 =1.07

IRR using financial Calculator
CF0=-180;CF1=9.5;CF2=29.7;CF3=37.30;CF4=41.80;CF5=46.40;CF6=146.60;CPT IRR =12.82%
IRR =12.82%

Based on NPV the project should be accepted. when NPV is positive it adds value to the firm. Hence project should be accepted.