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Sneakers 2013 Project Case Solution & Answer

Sneakers 2013 Project Case Study Solution

Introduction

A shoe manufacturing company –New Balance is situated in Brighton, United States. The company is highly known allaround the world due to the wide varieties and high quality shoes provided to end customers. The company has contemplated to exploit the market opportunity in 12 to 18 years old male market segment while this market has ignored by market competitors. Because of the star power of the lack of resources, the company could not compete in the young male market segment. With low competitive edge, the company has pressure growing to new market segment, increasing its market share and profit returns. However, the company contemplated to exploit the market opportunity to target the younger base of customers if the effective advertising & marketing strategies were used. Hence, the company has initiated Sneaker 2013 in response to such market opportunity. Even though, the project target was between 12 to 18 years old, the recent data of market was projected to be 27 years old and elder.In this way, the company began to assess Persistence – another hiking shoe proposal.

Background Information

New Balance, being one of the leading shoe manufacturer was making efforts to satisfy the demands of the market.  It mainly represents two different practices i.e. Sneaker 2013 and Persistence regarding their capital planning in the footwear market. Due to the difference in the product and target market despite considering James for the promotion of the product, the interest of the end users tend to switch. This is primarily based on the fact of innovative technological approaches used by the competitors in the industry which New Balance lacked. In contradiction, considering the fact of increase in the physical activity and participation of people in outdoor games, comfort shoes for walking and running under reasonable price range as compared to other brands in the market are expected to a key factor in increased product demand. As Sneakers is tending to be the first priority of the individuals of any age i.e. range from youngsters to old-age people not in the region of United States but across the world. Thus, expanding the range of target market is considered to serve as a competitive advantage for the organization and significantly predict increased sale.

Financial Analysis

Sneakers Project

1.Estimation of Initial Investment:

The initial investment required to execute the sneakers project amounts to $170 million. The initial investment required has been estimated considering various cash outflows which includes the cost of $150 million for building the factory in Vietnam, costs to purchase the equipment of worth $15 million and $5 million for the installation and delivery cost of the equipment. In addition, the inventory worth $15 million will be required immediately of which $5 million will be financed through accounts payable and working capital of $10 million will be needed. (See Appendix 1)

2. Project’s Annual Net Operating Cash Flows (2013-2018):

In the project’s first year, the estimatedcash outflow was about $7.35 million. Although profit of $42 million was projected, the company suffered cash outflow as a result of cannibalization effect and requirement of working capital in order to support the day to day operations of the business. However, significant cash inflows of $48 million, $68 million, 82 million, $86 million and $169 million is projected in the remaining years of the project which indicates the viability of the project. (See Appendix 2)

3.Terminal Non-Operating Cash flows (2018):

The determination of the terminal non-operating cash flows was done through use of Salvage values of fixed assets and return of net working capital (xplaind, 2020). As the Sneakers project includes investments in two fixed assets, factory and equipment, the terminal non-operating cash flows amounting $128 million is projected. This value is based on the scrap value of factory and equipment which is $102 and $3 million respectively. In addition the working capital recovered at the end of 2018 of worth $26.77 million was also include in determining the terminal non-operating cash flows of the project. (See Appendix 3)

  1. Viability of the Project:

Payback Period:

It is estimated that the investment worth $180 million in the project will be recovered in a period of 3.9 years. A payback period is based on cash flow’s present values discounted at 11% rate. This payback period is no more than the payback period of the sneakers project therefore, the persistence project seems viable on the basis of payback period. (See Appendix)

Net Present Value:

The net present value (NPV) of the Sneakers Project is estimated at $108 million which was evaluated through using a discount rate of 11%. The initial investment used in the NPV analysis does not include the working capital required of $10 million by the end of 0 year as the cash flows occurring at the end of the year are presented at the start of the next year as the discount factor of whole year is used. (See Appendix)…………………..

 

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