Question

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

Sneaker 2013 The business case team had compiled the following baseline information surrounding the Sneaker 2013 project: 1. The life of the Sneaker 2013 project was expected to be six years. Assume the analysis took place at the end of 2012. 2. The suggested retail price of the shoe was $190. Gross margins for high-end athletic footwear averaged about 40% at the retail level, meaning each pair sold would net New Balance $115.

Answer 1

	Cash Flows for the Sneaker 2013 Project
						Amounts in million
Sr. No	Particulars	2013	2014	2015	2016	2017	2018
2	Retail Price per Shoe	190	190	190	190	190	190
3	Estimated Sales Volume	1.2	1.6	1.4	2.4	1.8	0.9
	Sales Value	228	304	266	456	342	171
4	Lost Sales of Existing	35	15
	Net Sales revenue (A)	193	289	266	456	342	171
	Estimated Costs
5	Factory Building depreciation	3.9	7.3	6.5	6	5.4	4.8
6	Equipment Depreciation	4	5.1	2.1	1.1	0.9	0
8	Variable Costs	106.15	158.95	146.3	250.8	188.1	94.05
9	Selling General and Admin expenses	7	7	7	7	7	7
10	Endorsement paid to Kirani James	2	2	2	3	2	2
11	Other advertising & promotion Expenses	25	15	10	30	25	15
12	Expense on R&D	2
13	Interest Costs	1.2	1.2	1.2	1.2	1.2	1.2
	Total Costs (B)	151.25	196.55	175.10	299.10	229.60	124.05
	Net Income = (A-B)	41.75	92.45	90.90	156.90	112.40	46.95
	Less Tax @ 40%	16.7	36.98	36.36	62.76	44.96	18.78
	Net Income after Tax	25.05	55.47	54.54	94.14	67.44	28.17
	Add Back Depreciation
	Factory Building depreciation	3.9	7.3	6.5	6	5.4	4.8
	Equipment Depreciation	4	5.1	2.1	1.1	0.9	0
	Net Cash Inflows	32.95	67.87	63.14	101.24	73.74	32.97
	Add cash inflows at the termination of Project
	Cash flow on Sale of Building						5.64
	Cash flow on Sale of Equipment						1.56
	Working Capital release Back						307.60
	Total Cash Inflows	32.95	67.87	63.14	101.24	73.74	347.77
	Total Cash Out Flows
	Net Increase in Working Capital	52.33	48.41	44.56	76.38	57.29	28.64
	Initial Investment
	a. Factory	150
	b. Equipment	20
	Total Cash Out Flows	222.33	48.41	44.56	76.38	57.29	28.64
	For the Calculations of Present Values of Cash Inflows and Cash Out flows, we have :-
	Year	2013	2014	2015	2016	2017	2018
	PF factor for 11%	0.901	0.812	0.731	0.659	0.593	0.535
	Total Cash Inflows	32.95	67.87	63.14	101.24	73.74	347.77
	Present value of Cash Inflows	29.68	55.08	46.17	66.69	43.76	185.93
	Total PV of Cash Inflows						427.32
	Total Cash Out Flows	222.33	48.41	44.56	76.38	57.29	28.64
	PVF for Cash Out Flows (As the cash out flow is at the begning of the year	1.00	0.901	0.812	0.731	0.659	0.593
	Present value of Cash Out flows	222.33	43.61	36.16	55.85	37.74	17.00
	Total PV of Cash Out flows						412.68
A	For NPV = PV of Cash Inflows - PV of Cash Out Flows
	= NPV = 427 -412.68 =	14.64
C	For Payback Period
	Present value of Cash Inflows	29.68	55.08	46.17	66.69	43.76	185.93
	Present value of Cash Out flows	222.33	43.61	36.16	55.85	37.74	17.00
	Net Cash Inflow	-192.64	11.47	10.01	10.84	6.03	168.93
	Cumulative Cash Inflow	-192.64	-181.17	-171.16	-160.32	-154.30	14.64
	Pay Back Period = full years untill recovery + ( unrecovered cost at the beginning of last year /                                                                                       Cash flow during the year
	= PBP = 5 + ( 154.3 / 168.93 ) =	5.91	years
B	For IRR
	NPV @ 11% =	14.64
	NPV @ 15% =	-28.954283
	By applying Interpolation, we have
	IRR = 11 + 14.64 / 14-28.95) * (15-11)	=11 + 1.34	=12.34 %

7	Calculation of Working Capital
Add :-	WC in inventory	26.54	39.74	36.58	62.70	47.03	23.51
	( 25% of Varible Costs)
Les:-	Accounts Receivable	15.44	23.12	21.28	36.48	27.36	13.68
	( 8% of Project Revenue)
Add :-	Accounts Payable	21.23	31.79	29.26	50.16	37.62	18.81
	( 20% of Variable Costs)
Add :-	Initial rise in Inventory	15
Add :-	Initial rise in Accounts Payable	5
	Net Increase in Working Capital	52.33	48.41	44.56	76.38	57.29	28.64

Depreciation Schedule of Building
year	Opening Value	Depreciation %	Depreciation	Closing Value
1	150	2.60%	3.9	146.1
2	146.1	5.00%	7.3	138.8
3	138.8	4.70%	6.5	132.3
4	132.3	4.50%	6.0	126.3
5	126.3	4.30%	5.4	120.9
6	120.9	4.00%	4.8	116.1
	Selling Price on termination			102
	Loss on Sale of Building			14.1
	Tax saving on loss on sale @ 40% =5.64

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