# Question

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?

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