# Question: You have been hired as a capital budgeting analyst by

You have been hired as a capital budgeting analyst by a sporting goods firm that manufactures athletic shoes and has captured 10% of the overall shoe market (the total market is worth $100 million a year). The fixed costs associated with manufacturing these shoes are $2 million a year, and variable costs are 40% of revenues.

The company’s tax rate is 40%. The firm believes that it can increase its market share to 20% by investing $10 million in a new distribution system (which can be depreciated over the system’s life of 10 years to a salvage value of zero) and spending $1 million a year in additional advertising. The company proposes to continue to maintain working capital at 10% of annual revenues. The discount rate to be used for this project is 8%.

a. What is the initial investment for this project?

b. What is the annual operating cash flow from this project?

c. What is the NPV of this project?

d. How much would the firm’s market share have to increase for you to be indifferent to taking or rejecting this project?

The company’s tax rate is 40%. The firm believes that it can increase its market share to 20% by investing $10 million in a new distribution system (which can be depreciated over the system’s life of 10 years to a salvage value of zero) and spending $1 million a year in additional advertising. The company proposes to continue to maintain working capital at 10% of annual revenues. The discount rate to be used for this project is 8%.

a. What is the initial investment for this project?

b. What is the annual operating cash flow from this project?

c. What is the NPV of this project?

d. How much would the firm’s market share have to increase for you to be indifferent to taking or rejecting this project?

## Answer to relevant Questions

You are considering the possibility of replacing an existing machine that has a book value of $500,000, a remaining depreciable life of five years, and a salvage value of $300,000. The replacement machine will cost $2 ...The unlevered beta of electronics firms, on average, is 1.1. The riskless rate is 6.5%, and the market risk premium is 6%. a. Estimate the expected return, using the CAPM. b. If you are a venture capitalist, why might you ...MVP, a manufacturing firm with no debt outstanding and a market value of $100 million, is considering borrowing $40 million and buying back stock. Assuming that the interest rate on the debt is 9% and that the firm faces a ...Assume that personal investors pay a 40% tax rate on interest income and only a 20% tax rate on equity income. If the corporate tax rate is 30%, estimate whether debt has a tax benefit, relative to equity. If a firm with no ...Zycor Corporation obtains most of its funding internally. Assume that the stock has a beta of 1.2, the riskless rate is 6.5%, and the market risk premium is 6%. a. Estimate the cost of internal equity. b. Now assume that the ...Post your question