Sneakers 2013 Case Study Solution
New Balance is a shoe manufacturing company,which is located in Brighton, United States. New Balancehas contemplated to exploit the market opportunity in 12 to 18 years old male market segment,as this market has been highly ignored by the market competitors. Due to the star power of the lack of resources; the company was unable to compete in the young male market segment. With lower competitive edge; the company has the pressure, growing into new market segment and increasing its profit returns and market share. However, the company has pondered to exploit the market opportunity to target the younger base of customers, if the effective marketing & advertisingstrategies are used. Hence, the company has initiated Sneaker 2013 in response to such market opportunity. Even though, the project target was to be emphasized on the market of malesfrom 12 to 18 years old; the recent data of market was projected to be 27 years olds and elder. In this way, the company began to assess Persistence – another hiking shoe proposal.
Items included in capital budgeting cash flow projection
The calculation of the project’s cash flows follows the net income, which is generated after deducting the cost of operations from the gross margin. The cost of goods sold, variable cost and depreciation expense are deducted from the revenues, resulting in gross profit. The net revenues are resulted when the cannibalization effect of Sneakers project is deducted from the actual revenues. From the gross profit, the selling, general and administrative cost, research and development cost, advertising and promotional expenses and depreciation expenses are deducted, which resulted in the operating income. To calculate the EBITA, the interest expenses is deducted from EBIT and added into depreciation expense, change in net working capital and purchase and installation of the fixed assets, hence resulting in the cash flows of the project. Shortly, all the listed items are required for the capital budgeting cash flow projection.
Projected capital budgeting cash flow
Initial investment outlay
The initial investment required to execute the sneakers project amounts to $180 million. The initial investment requirement has been estimated by taking into consideration the various cash outflows, which includes the cost of $150 million for building the factory in Vietnam, costs of purchasing the equipment of worth $15 million and $5 million for the installation and delivery cost of the equipment. In addition, the inventory of worth $15 million will be required immediately, out of which $5 million will be financed through accounts payable and working capital of $10 million will be required.
Net operating net cash flows
In the project’s first year, the estimated cash outflow was about -$30.4 million. Although the profit of $9.5 million was projected; the company suffered from a cash outflow as a result of cannibalization effect and requirement of working capital, in order to support the daily operations of the business. However, the significant cash inflows of $28.6 million in 2015, $33 million in 2016, $38 million in 2017 and $126 million in 2018are projected in the remaining years of the project, which indicates the viability of the project.
Non-operating net cash flows
The determination of the terminal non-operating cash flows was done through the use of Salvage values of fixed assets and return of net working capital. As the Sneakers project includes investments in two fixed assets: factory and equipment; the terminal non-operating cash flows amounting $117 million, is projected. This value is based on the scrap value of factory and equipment, which is $102 and $3 million respectively. In addition to this, the working capital recovered at the end of 2018 of worth $12.25 million was also included in determining the terminal non-operating cash flows of the project…………………………………
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