Sneaker 2013 Case Solution

Sneaker 2013 Case Solution

1.      Depreciation:

It is a non-cash item therefore; it is irrelevant in the capital budgeting process for calculating NPV.

7.     Advertising and promotion expense:

They both are related with project, as they are directly related with the cost that affects the profitability and are considered as outflow in NPV calculation.

Initial Cash Investment:

The initial investment is the amount paid before the project has been started, it is always negative and most of the time, large amount is invested by the company in order to generate positive future cash flows.

Operating cash flows:

The net free cash flow for 6 years from 2013 to 2016 before and after tax is shown below:

Sneakers 0 2013 2014 2015 2016 2017 2018
Net Cash Flows -56  $      47  $   103  $   94  $ 139  $  99  $   44
Net Cash Flows after taxes -56  $      19  $   41  $  38  $  56  $ 40  $    18

Persistence 0 2013 2014 2015
Net Cash Flows    $          33  $          49  $          72
Net cash Flows after tax    $          13  $          20  $          29
Discounting  $        (23)  $          12  $          16  $          21

Feasibility and difference of both projects in terms of NPV, IRR and Payback period:

NPV:

 The NPV of Sneakers project is $36.52 million and Persistence is $12.14 million. Therefore, both projects are feasible due to positive net present value but the sneakers project is more favorable due to high net present value.

Pay Back Period:

It tells about how much time it will take to collect the invested amount made for a project. Here, the payback period is calculated by cumulative cash flows due to uneven amounts of cash flows. The benefit of payback period is that it results in early recovery, even when the company has high cash inflow and is also considered viable because it measures risk associated in the project in terms of certain future returns.

The persistence project’s payback period cannot be calculated due to insufficient years of projection.

IRR;

IRR is the rate that can be used to calculate the PV of net cash flows. It is used as discount rate at which the PV of net cash flow becomes zero and it is less feasible to use than Payback and NPV. The sneaker project results in 39% in net present value results in zero worth and on the other hand, persistence IRR results in 44%.

Therefore, it is considered that the Sneaker project is feasible in terms of NPV, IRR,and Payback period and persistence is feasible regarding NPV and IRR.

Conclusion:

The conclusion is made on the feasibility of project by comparing NPV, IRR, and return in years of both projects. Therefore, the decision criteria shows that the project of higher and positive net present value should be carried forward for sneaker project, as it results in higher NPV as compared to Persistence project………………..

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Sneaker 2013 Case Solution
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