Question

NPV Question 1: Adidas is thinking about designing a new pair of shoes Adidas believes it can sell 40,000 pairs of these shoes a year, for 3 years for a price of $100 per pair. The cost per pair of shoes to the firm will be $70 per pair. The project requires a $1,500,000 investment today and will return nothing at the project's end. Adidas has a a discount rate of 16% on all projects. Should the project be undertaken, and if so what is its NPV?

Answer 1

Investment Required Today = CF0 = $1,500,000

Selling price per shoe = $100

Cost price per shoe = $70

Profit per shoe = 100 - 70 = $30

Total Profit in an year = Profit per shoe*number of shoes = 40000*30 = $1,200,000

Hence, CF1 = $1,200,000
CF2 = $1,200,000
CF3 = $1,200,000

Discount Rate = r = 16%

NPV = -CF0 + CF1/(1+r) + CF2/(1+r)² + CF3/(1+r)³

= -1500000 + 1200000/(1+0.16) + 1200000/(1+0.16)² + 1200000/(1+0.16)³

= $1,195,067.45

Since the NPV is positive, the project should be undertaken

NPV = $1,195,067.45