Answer No. 4
Following are the consolidated results of NPV, IRR and payback period
Persistence or Sneaker 2013?
Based on riskiness of the projects, Persistence is more risky then Sneaker 2013. As we can see that its IRR is less than cost of capital, which means project is not feasible. And its payback period is also 2 years and 238 days, where its overall life is 3 years. On the other hand ‘Sneaker 2013” has payback period of 3 years and 4 months, whereas its overall life of the project is 6 years. In case of ‘Sneaker 2013”, its net cash flow turn into positive in the 3rd year, with net cash flow of $369 million at the end of 6th year. In contrast net cash flow balance of Persistence projects turn positive in the last year of project’s life, with just $48 million.
Based on our capital budget analysis ‘Sneaker 2013’ seems attractive to long term investors, as its payback period is 3years and 128 days, but both its Net present value (NPV) and Internal rate of return (IRR) is greater than project ‘Persistence’ i.e. $138 million and 15% respectively.
Forecasting cash flow is critical for any project, but particularly in this case Rodriguez should be more critical of cash flow forecast for the project ‘Sneaker 2013’ as compare to ‘Persistence’, because tenure of project in greater in case of ‘Sneaker 2013’. Therefore it’s more difficult to forecast performance of a company 5 years later than that of 2 years.
Based on the analysis, my recommendation to Rodriguez is, he should go for the project “Sneaker 2013” because it is NPV is much greater than that of Persistence, and IRR is greater than cost of capital.
Persistence project shouldn’t be undertaken, because its Internal rate of return is even less than cost of capital, which means it less more costly to New Balance to undertake the project……………..
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