Question

Please show cash flows, NPV, IRR, and payback period

Persistence Rodriguez was still contemplating the Sneaker 2013 project when she began reviewing another proposal for a new hiking shoe being considered. The hiking shoe would be named Persistence. The hiking and active walking sector was one of the fastest growing areas of the footwear industry and one they had not yet entered. She was confident that hiking shoes would be the newest footwear trend in the coming decade. The target market for this shoe would be men and women in the 25- to 40-year-old age category. The business case for the hiking shoe needed some work; but after preliminary analysis, she focused on the following information: 1. The life of the Persistence project would be only three years, given the steep technological learning curve for this new product line. 2. The wholesale price of Persistence (net to New Balance) would be $90.00. 3. The hiking segment of the athletic shoe market was projected to reach $350 million during 2013, and it was growing at a rate of 15% per year. New Balance's market share projections for Persistence were: 2013, 15%, 2014, 18%; and 2015, 20%.

Answer 1

A.calculation of cash flows
Cashoutflow at the beginning
Investment	In Millions
Machine purchase	$                     8
Design and technology	$                  50
Increase of working captial (Accounts recievable -Accounts payable) 25-10	$                  15
	$                  73
Cashinflow during the 3 years
		2013	2014	2015
Hiking shoes in Millions $		350	402.5	462.875
Market share %		15%	18%	20%
		Year 1	Year 2	Year 3
		In Millions
A.Net sales		$                         53	$              72	$              93
B.Variable cost @ 38%		$                         20	$              28	$              35
Contribution		$                         33	$              45	$              57
General and administrative expenses in revenue		12%	10%	8%
less:General and administrative expenses in revenue		$                           6	$                7	$                7
less: Advertising and promotion cost		$                           3	$                2	$                2
Deprication %		20%	32%	19%
less:Deprication		$1.60	$2.56	$1.52
Less:Annual interest cost for service design and technology		$0.60	$0.60	$0.60
Net Income		$                   21.05	$        32.51	$        45.87
Marginal tax rate	40%	$8.42	$13.01	$18.35
Net income after taxes		$12.63	$19.51	$27.52
Add:Deprication		$1.60	$2.56	$1.52
After tax cashflow		$14.23	$22.07	$29.04
Sale of Machine at Book value in year 3				$2.32
Release of working captial (Accounts recievable -Accounts payable) 25-10				$15.00
Cashflow receivable		$14.23	$22.07	$46.36

A.Calculation of NPV
Required rate of return	14%
	year 1	year 2	year 3	total
Cashflow in Millions	$14.23	$22.07	$46.36
Discount factor	0.877192982	0.769467528	0.6749715
Discounteed cashflow recivable in Millions	$12.48	$16.98	$31.29	$60.76
Cashoutflow at the beginning				$              73
Npv @ 14% in millions				$     (12.24)

C.Calculation of IRR
Required rate of return	5.00%
	year 1	year 2	year 3	total
Cashflow in Millions	$14.23	$22.07	$46.36
Discount factor	0.952380952	0.907029478	0.8638376
Discounteed cashflow recivable in Millions	$13.55	$20.02	$40.05	$73.62
Cashoutflow at the beginning				$              73
Npv @ 5% in millions				$          0.62
Required rate of return	6.00%
	year 1	year 2	year 3	total
Cashflow in Millions	$14.23	$22.07	$46.36
Discount factor	0.943396226	0.88999644	0.8396193
Discounteed cashflow recivable in Millions	$13.42	$19.64	$38.93	$71.99
Cashoutflow at the beginning				$              74
Npv @ 6% in millions				$        (1.63)
To calculate IRR the NPV of the project should be zero which lies between 5% and 6%
IRR	5% +	0.62/(0.62+1.63)
IRR %	5.30%