Sneaker 2013

Project details: mid-tech, high quality running shoes

Life span 6 years
MRP at retail $ 190 /product pair
Rate for company (60%) $ 115 /product pair

Initial cashflow Operating Cash

T0 T1 T2
Year 2012 2013 2014
Inventory $ 15
(-) Payables increase $ 5
NWC $ 10
Inventory $ 14.16 $ 23.24
A/R $ 8.24 $ 13.52
A/P $ 11.33 $ 18.59
NWC $ 10 $ 11.07 $ 18.17
Net cash flow $ -1.07 $ -7.09
Recapture of WC

Year 2012 2013 2014

Pairs sold (millions) = N 1.2 1.6
Rate for company $ 115 $ 115
Total revenue from sneakers (N*rate) (in millions) $ 138 $ 184
Less : lost revenue due to Canabalisation $ -35 $ -15
Net Incremental revenue $ 103 $ 169
(-) Variable cost (55% of total revenue) $ 56.65 $ 92.95

Gross Profit $ 46 $ 76

Factory (39 yr dep) = 150Mn Face Value $ 150

Depreciation on Factory% on face value 2.6% 5.0%
Depreciation on Factory $ 3.90 $ 7.50
Book value (previous year value-dep) $ 146.10 $ 138.60
Depreciation Calculation

Factory resale (Salvage value)

Loss on sale on Factory (BV-Salvage value)
Tax saving on Loss of sale of Factory (@40%)
Equipment (5 year dep) = 20Mn $ 20
Depreciation on equipment% 20% 32%
Depreciation on Equipment $ 4.0 $ 6.4
Book value (previous year value-dep) $ 16.0 $ 9.6
Equipment resale
Gain on sale on Equipment (BV-Salvage value)
Less : Tax on gain of sale of Factory (@40%)
(-) Total Depcreciation $ 8 $ 14
(-) S,G,A expenses $ 7 $ 7
 (-) Endoresement fees $ 2 $ 2
(-) Advt & Prom Expense $ 25 $ 15

Earnings before Interest and tax (EBIT) $ 4.45 $ 38.15

Tax @40% $ 1.78 $ 15.26

Incremental Earnings (EBIAT) $ 2.67 $ 22.89

CF:
Add back dep (Factory + Equipment) $ 8 $ 14
(-) Purchase of PPE -150
(-) Purchase of Equipment -20
Changes in WC $ -10 $ -1.07 $ -7.09
Terminal cashflow from sale of PPE
Incremental Free Cash Flow -180 $ 9.50 $ 29.70

Capital Budget Decisions:

1 NPV from Year 2014 to 2017 - 2013 outflow $ 13.36

Answer:
Greater than 0
Project is acceptable
If sneaker is introduced, then sneaker will be wealthier by 13.36 Million

2 IRR method 13%

COC 11%

3 Year 0 1 2
Payback method -180 $ -170.50 $ -140.81

4 PI Method $ 1.074

5 EAA Method $ 3.16

Summary Table Sneaker Status

NPV from 2012 to 2018 $ 13.36 Accept
IRR method 13%>11% Accept
Payback method 5.1 years Accept
PI Method 1.0742 Accept
EAA Method $ 3.16 Accept
 Operating Cashflow Terminal Cashflow
T3 T4 T5 T6
2015 2016 2017 2018

$ 22.14 $ 37.95 $ 28.46 $ 14.23

$ 12.88 $ 22.08 $ 16.56 $ 8.28
$ 17.71 $ 30.36 $ 22.77 $ 11.39
$ 17.31 $ 29.67 $ 22.25 $ 11.13
$ 0.86 $ -12.36 $ 7.42 $ 11.13 Netcashflow from WC
$ 11.13 $ 22.25

James Olymp
2015 2016 2017 2018
1.4 2.4 1.8 0.9
$ 115 $ 115 $ 115 $ 115
$ 161 $ 276 $ 207 $ 104

$ 161 $ 276 $ 207 $ 104

$ 88.55 $ 151.80 $ 113.85 $ 56.93

$ 72 $ 124 $ 93 $ 47

4.7% 4.5% 4.3% 4.0%

$ 7.05 $ 6.75 $ 6.45 $ 6.00
$ 131.55 $ 124.80 $ 118.35 $ 112.35
$ 102 net cashflow =
$ -10.35 102+4.14=106.14
$ 4.14 $ 106.14

19% 12% 11% 6%

$ 3.8 $ 2.4 $ 2.2 $ 1.2
$ 5.8 $ 3.4 $ 1.2 $ -
$ 3
$ 3.0 net cashflow =
$ 1.2 $ 2
$ 11 $ 9 $ 9 $ 7
$ 7 $ 7 $ 7 $ 7
 $ 2 $ 3 $ 2 $ 2
$ 10 $ 30 $ 25 $ 15

$ 42.60 $ 75.05 $ 50.50 $ 15.37

$ 17.04 $ 30.02 $ 20.20 $ 6.15

$ 25.56 $ 45.03 $ 30.30 $ 9.22

$ 11 $ 9 $ 9 $ 7

$ 0.86 $ -12.36 $ 7.42 $ 22.25 $ 130.19

$ 107.94
$ 37.27 $ 41.82 $ 46.37 $ 146.62

s:

3 4 5 6
$ -103.54 $ -61.72 $ -15.35 $ 131.26

5.10 years
 Persistence

Project details: New hiking shoes

Life span 3 years
Rate for Company $ 90 /product

Year 2013 2014 2015

Change in Inventory & A/R $ 25
Payables increase $ 10
NWC $ -15

Initial cashflow Operating Cashflow

Year 2012 2013 2014 2015

Market growth projections $ 350 $ 402.5 $ 462.9

Persistence projected market share 15% 18% 20%
Total Revenue (estimated) $ 52.5 $ 72.4 $ 92.6

(-) Variable cost (38% of total revenue) $ 20.0 $ 27.5 $ 35.2

Equipment (5 yr dep) bought at 8Mn $ 8
Depreciation rate 20% 32% 19%
(-) Depreciation amount $ -1.60 $ -2.56 $ -1.52
Book Value $ 6.40 $ 3.84 $ 2.32
Resale price $ 2.32
(-) S,G, A Expenses $ 6.30 $ 7.24 $ 7.41
(-) Advt & Prom Expense $ 3 $ 2 $ 2
(-) Outsource tehcnology $ -50 $ - $ - $ -
Earnings before Interest and tax $ -50 $ 21.6 $ 33.1 $ 46.5
Tax @40% $ 20.0 8.7 13.2 18.6
EAT $ -30.0 13.0 19.9 27.9
Purchase of Equipment (Capex) $ -8
Add back dep $ 1.60 $ 2.56 $ 1.52
Change in WC $ -15
Cashflow from sale of equipment $ 2.32
Recapture of WC $ 15
Net Cashflow $ -53.00 $ 14.59 $ 22.43 $ 46.72

Capital Budget Decisions:

1 Year 2012 2013 2014 2015

NPV Method (By repeatitive chain investment) $ -53.00 $ 14.59 $ 22.43 $ 46.72
NPV= $ 8.59

2 IRR method 21.75%

COC 14%

3 Years 0 1 2 3
 Payback Method $ -53.00 $ -38.41 $ -15.98 $ 30.74

2.34 years
4 PI Method 1.16

5 EAA Method $ 3.70

 Application of EAA and replica method because both projects life is different

Summary Table Sneaker

NPV Method for 2012 to 2018 (in million) $ 13.36
IRR method 13%>11%
Payback method 5.10 years
PI Method 1.0742
EAA Method (in million) $ 3.16
Terminal CF
Sneakers < Persistence

No gain/ loss
Net Cashflow
$ 2.32

Recapturing WC
s life is different

Persistence Which is better?

$ 8.59 Sneaker
21.75% > 14% Persistence
2.34 years Persistence
1.1621 Persistence
$ 3.70 Persistence

ence