take the role of manager of technology acquisition at upscale knitwear seller Jon Smedley. The firm is interested in using Knyttan technology as a platform for the production of bespoke goods in leisure lines, and as a means of appealing to more trendy, up-market consumers (Kansara, 2015). Production of bespoke goods is commissioned by the buyer. Knitwear seller Jon Smedley's intention is to form a partnership with Unmade (Unmade, n.d.), which developed Knyttan technology for its own use. Alongside Knyttan, Unmade developed a customization engine that serves as an easily embeddable product that can be integrated into any website, allowing a user (an employee internal to the firm, an intermediate buyer or an external customer) to turn a digital product into on-the-spot knitwear in minutes. Jon Smedley intends to use Knyttan, controlled by this customization engine available to consumers, to widen its sales substantially beyond its main traditionalist customer base using this technology. The firm sees significant possibilities for peer-to-peer trendsetting, as users form their own unique designs. We also see the possibility of celebrity-led designs. We believe that these features will be especially fruitful in the upscale market. The cost of the Knyttan unit ($197,445) will be paid off in seven equal installments, in which case interest is charged only on the remaining debt, per year. Taxes for Jon Smedley average 34%. Depreciation is straight line to zero, and net working capital is initially $20,000, but falls to 5% of sales (patient services) thereafter. You estimate that interest may rise to vary from 8% to 18%, prior to the point when financing will be conducted. The firm demands that new projects are discounted at a rate of 28%. Resulting tabulations at an 8% rate of interest are seen below, in Tables 1 and 2. Table 3 summarizes results at 8% and 18% rate of interest.

Managers in a variety of design and technical divisions are concerned that a project of this magnitude will strain resources available to other projects. As manager of technology acquisition, you have been invited to share a summary of major issues involved in a decision to adopt new technology of this nature, at a financial level, with key management peers. You understand that this may be challenging because your audience is non-financial, and so you plan to outline central financial issues involved in this decision to adopt a Knyttan, in partnership with Unmade. Jon Smedley's chief executive officer has agreed to this approach and has instructed you, as manager of technology acquisition at Jon Smedley, to determine whether the project will be acceptable should interest rates increase as expected, and financing for the Knyttan device will consist of debt, on which the firm will be charged a market rate of interest. Assume that you have prepared the summaries of financial data included below, using an interest rate of 8% (Tables 1 and 2). Table 3 summarizes the results.

Operating Cash Flow	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Revenue	(197,445)	320,000	800,000	700,000	700,000	700,000	600,000	840,000
Cost of Sales	-	256,000	640,000	560,000	560,000	560,000	480,000	672,000
I. Operating Cash Flow
EBIT	-	64,000	160,000	140,000	140,000	140,000	120,000	168,000
Depreciation	-	28,206	28,206	28,206	28,206	28,206	28,206	28,206
Taxes (34%)	-	21,760	54,400	47,600	47,600	47,600	40,800	57,120
Interest on outstanding debt (8%)	-	15,796	13,539	11,283	9,026	6,770	4,513	2,257
Operating Cash Flow	-	54,651	120,267	109,324	111,580	113,837	102,893	136,830
II. Net Working Capital
Initial NWC	(20,000)	-	-	-	-	-	-	-
Change in NWC	-	4,000	(24,000)	5,000	10,000	20,000	45,000	33,000
NWC Recovery	-	-	-	-	-	-	-	13,000
Total Change in NWC	(20,000)	4,000	(24,000)	5,000	10,000	20,000	45,000	46,000
III. Capital Spending
Initial Outlay	(197,445)	-	-	-	-	-	-	-
Aftertax Salvage	-	-	-	-	-	-	-	29,617
Total Capital Spending	(197,445)	-	-	-	-	-	-	29,617

Table 1.

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Operating Cash Flow	-	54,651	120,267	109,324	111,580	113,837	102,893	136,830
Changes in NWC	(20,000)	4,000	(24,000)	5,000	10,000	20,000	45,000	46,000
Capital Spending	(197,445)	-	-	-	-	-	-	29,617
Total Project Cash Flow	(217,445)	58,651	96,267	114,324	121,580	133,837	147,893	212,447
Cumulative Cash Flow	(217,445)	(158,794)	(62,527)	51,797	173,377	307,214	455,108	667,554
Discount Term = 1/(1+r)tat 28%	1.00	1.28	1.64	2.10	2.68	3.44	4.40	5.63
Discounted Cash Flow	(217,445)	(124,058)	(38,163)	24,669	64,588	89,411	103,480	118,581

Table 2.

8%
NPV	21,093
IRR	30%
Payback Period	3.2 Years
18%
NPV	(115,908)
IRR	20%
Payback Period	3 Years

Table 3.

1. At interest rates of 8% and 18%, analyze project finances using Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Criteria as these may be used to determine the acceptability of the proposed project, under the assumption that the project is standalone and will not draw resources from other areas of the firm. Include an analysis of all components of project cash flow.
2. Recalling that (EBIT + Depreciation - Interest - Taxes) = Operating Cash Flow, evaluate the role of net working capital, depreciation and taxation in determining project cash flows.

Answer rating: 100% (QA)

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