## Sneakers 2013 Project Case Study Solution

Profitability Index:It is estimated that the Sneakers project will achieve profitability index of 64% which is based on the cash flowâ€™s present values and initial investment of $170 million as the working capital is already incorporated in the projectâ€™s cash flows in near future. The profitability index estimated indicates that only 64% of the initial investment will be recovered if the sneakerâ€™s project is undertaken. (See Appendix)

- Sensitivity Analysis:

In order to perform projectâ€™s sensitivity analysis, the discount rate of 11% used in evaluating the project has been increased and decreased by 4%. The discount rate sensitivity indicates the variation in the net present value of the project as a result of changes in the discount rate. A significant increase in the discount rate by an approximate of 4%, the net present value of the project will be declined to $68.5 million as compared to the estimated NPV of the project worth $108 million. Similarly, the NPV of the project will increase to $158 million as a result of increasing the discount rate by 4%.Â (See Appendix)

Persistence Project

Estimation of Initial Investment:

Theinitial investment required to execute the Persistence project amounts to $73000000 which includes the amount of cash outflows such as equipment, outsourcing design technology and change in working capital amounts to $50000000 and $15000000 respectively.In addition, the inventory worth $25 million would be required of which $10 million amount would be financed through account payable and remaining balance $15000000 would be required as a working capital.

Projectâ€™s Annual Net Operating Cash Flows (2013-2018):

In the projectâ€™s first year, a cash outflow of $0.77 million is estimated. Although profit of $14.23 million was projected, the company suffered cash outflow as a result of higher tax expense and working capital of $15 million required in terms of providing support to the regular businessoperations. However, significant cash inflows of $22 million and $46 million is projected in the remaining years of the project. (See Appendix)

Terminal Non-Operating Cash flows (2018):

Considering the project includes only one fixed asset which is equipment, the terminal non-operating cash flow $17.32 million is projected.Â This value is based on the scrap value of the equipment which is $2.32 million as the equipment will be sold at its book at the end of the projectâ€™s life. In addition the working capital recovered at the end of 2018 of worth $15 million was also include in determining the terminal non-operating cash flows of the project. (See Appendix)

Viability of the Project:

Payback Period: It is estimated that the investment worth $58 million in the project will be recovered in a period 2.5 years. The payback period is based on cash flowâ€™s present values discounted at 14% rate. (See Appendix)

Net Present Value: The NPV of the Persistence Project is estimated at $10.4 million which was evaluated through use of 14% discount rate. The NPV is based on the total cash flows earned during the project period of three years. The initial investment used in the NPV analysis does not include the working capital required of $15 million by the end of year zero 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)

Internal Rate of Return (IRR): The internal rate of return of the Persistence Project is estimated to be 5.89%, this has been calculated using Net present value amounting $10.4 million and discount rate of 14% of the persistence project. Considering, the IRR is lower as compared to the discount rate and IRR of the sneakers project, a persistence project is likely to be unacceptable by the company. (See Appendix)

Discounted Cash flows: for the determination of the projectâ€™s net present value, the cash flows occurring during the life of the project are discounted using a rate of 14%. As a result of discounting the cash flows, the NPV of the project worth $10.4 million is estimated.

Profitability Index: It is estimated that the Persistence project will achieve profitability index of 18% which is based on the cash flowâ€™s present values and initial investment of $58 million as the working capital is already incorporated in the projectâ€™s cash flows in future. The profitability index estimated indicates that only 18% of the initial investment will be recovered if the project is undertaken. (See Appendix)

- Sensitivity Analysis:

In order to perform sensitivity analysis of the project, the discount rate of 14% is used in evaluating the project has been increased and decreased by 4%. The discount rate sensitivity indicates the variation in the NPV of the project as a result of changes in the discount rate. The increase in the discount rate by an approximate of 4%, the NPV of the project will increase to $14.5 million as compared to the estimated NPV of the project worth $10.4 million. Similarly, the NPV of the project will decrease to $5.68 million as a result of decreasing the discount rate by 4%. (See Appendix)…………………………..

This is just a sample partical work. Please place the order on the website to get your own originally done case solution.