Sneakers 2013 i)Estimate the initial outlay Initial Outlay Cost of Asset Freight and Installation Depreciable asset Inventory increased Account Payable increased Investment in NWC Net Initial Outlay
($15,000,000) ($5,000,000) ($20,000,000) ($15,000,000) $5,000,000 ($20,747,500) ($50,747,500)
ii)Estimate the annual cash flow and the terminal cash flow Annual Cash Flows Revenue Increased in : Selling, general and administration Endorsement cost Advertising and promotion cost Variable cost Research and development Increased depreciation EBT
2013 $193,000,000
2014 $289,000,000
2015 $266,000,000
2016 $456,000,000
2017 $342,000,000
2018 $171,000,000
($7,000,000) ($2,000,000) ($25,000,000)
($7,000,000) ($2,000,000) ($15,000,000)
($7,000,000) ($2,000,000) ($10,000,000) ($146,300,000 ) ($3,800,000) $96,900,000
($7,000,000) ($3,000,000) ($30,000,000)
($7,000,000) ($2,000,000) ($25,000,000)
($7,000,000) ($2,000,000) ($15,000,000)
($250,800,000) ($2,400,000) $162,800,000
($188,100,000) ($2,200,000) $117,700,000
($94,050,000) ($1,200,000) $51,750,000
($106,150,000) ($158,950,000) ($2,000,000) ($4,000,000) ($6,400,000) $46,850,000 $99,650,000
Taxes (40%) EAT Depreciation Revesal Annual Cash flow Terminal Cash Flow Salvage Value Tax On Sales New Assets (40%) After-tax proceeds from sale of new asset Recapture of NWC Terminal Cash Flow
($18,740,000) $28,110,000 $4,000,000 $32,110,000
($39,860,000) $59,790,000 $6,400,000 $66,190,000
($38,760,000) $58,140,000 $3,800,000 $61,940,000
($65,120,000) $97,680,000 $2,400,000 $100,080,000
($47,080,000) $70,620,000 $2,200,000 $72,820,000
($20,700,000) $31,050,000 $1,200,000 $32,250,000
$3,000,000 ($1,200,000) $1,800,000 $20,747,500 $24,347,500
ii)Estimate the NPV NPVs Year 0 2013 2014 2015 2016 2017 2018
Cash Flow ($50,747,500) $32,110,000 $66,190,000 $61,940,000 $100,080,000 $72,820,000 $32,250,000
Discount Rate = 11%
NPV = 18460000(PVIF11%,1 yr.)+37840000(PVIF11%,2yr)+33590000((PVIF11%,3 yr.) + 51480000(PVIF11%,4 yr.)+36370000(PVIF11%,5 yr.)
+(14025000+10,886,400)(PVIF11%,6 yr.)-50747500 = 28931110+53733042+45312207+61429104+39570388+27229057.25-50747500 = 256204908-50747500 = $205,457,408
Conclusion: The initial cash outlay is the amount paid to start the project or the investment. The result is in the negative amount (-$50,747,500) because large initial capital investment is made by the organization for the purpose of generating the future positive cash flow in return. Net Present Value (NPV) is the difference of the total cash inflows and the total cash outflows of the project. The net cash flow is then discounted by the rate of cost of capital. This technique incorporates all the relevant future cash flow making it more viable in the investment appraisal tools. The NPV of the Sneakers project is $205,457,408 so we would accept the project.
CALCULATION:
Estimated sales volumes Pairs sold (million) Each pair total sales Lost sales After lost sales/Revenue Gross Profit Gross Margin Variable cost = 55% of revenue
2013 2014 $1,200,000 $1,600,000 $190 $190 $228,000,00 $304,000,00 0 0 ($35,000,000 ($15,000,000 ) ) $193,000,00 $289,000,00 0 0 $115,600,00 $77,200,000 0 40% 40%
$106,150,00 Total cost = 0 Account Receivable = 8% of Revenue Account Receivable = $15,440,000 Account payable = 20% of Variable cost Total Account payable = $21,230,000 Inventory = 25% of Variable cost Total Inventory = $26,537,500 Net Working Capital = $20,747,500
Year
2013
$158,950,00 0
2014
2015 $1,400,000 $190 $266,000,00 0
2016 $2,400,000 $190 $456,000,00 0
2017 $1,800,000 $190 $342,000,00 0
2018 $900,000 $190 $171,000,00 0
$266,000,00 0 $106,400,00 0 40%
$456,000,00 0 $182,400,00 0 40%
$342,000,00 0 $136,800,00 0 40%
$171,000,00 0
$146,300,00 0
$250,800,00 0
$188,100,00 0
$94,050,000
Depreciation Expenses 2015 2016
2017
2018
$68,400,000 40%
Depreciation Percentage Equipment (At Cost) 20,000,000 Acc. Dep.
20% $4,000,000 $4,000,000
32% $6,400,000 $10,400,000
Year Depreciation Percentage At Cost, 150,000,000 Acc. Dep.
2013 2.60% $3,900,000 $3,900,000
2014 5% $7,500,000 $11,400,000
19% 12% $3,800,000 $2,400,000 $14,200,000 $16,600,000 Depreciation factory 2015 2016 4.70% 4.50% $7,050,000 $6,750,000 $18,450,000 $25,200,000
11% $2,200,000 $18,800,000
6% $1,200,000 $20,000,000
2017 4.30% $6,450,000 $31,650,000
2018 4% $6,000,000 $37,650,000
