The life of the sneaker project is expected to be 6 years. The suggested retail price is
Question:
The life of the sneaker project is expected to be 6 years. The suggested retail price is $190. The wholesale price is $115. The expected pairs sold per year in millions is: 1.2, 1.6, 1.4, 2.4, 1.8, 0.9 . The new sneaker would reduce sales of existing sneakers in the first two years. The lost wholesale sales would be $35M in year one and $15M in year two. (Assume the variable costs and NWC associated with the lost sales are the same as on the new sneaker and that there are no other cost savings from the lost sales.) The new shoe requires a new factory to be built. The immediate cost is $150M, to be depreciated on a 39-year MACRS basis. The first six years of depreciation percentages are: 2.6%, 5.0%, 4.7%, 4.5%, 4.3% and 4.0%. The building can be sold for $102M at year six. The factory requires equipment costing $15M. Freight and installation of the equipment is $5M. The equipment will be depreciated on a 5-year MACRS basis. The six year depreciation percentages are: 20%, 32%, 19%,12%, 11% and 6%. The equipment can be sold for $3M at the end of the project. The working capital accounts would be impacted as follows: approximately $15M of inventory will be needed quickly to fill the supply chain, and accounts payable will increase by $5M. By the end of year one, the accounts receivable balance will be 8% of revenue, inventory will be 25% of the project variable costs, and accounts payable will be 20% of the project variable costs. These percentages will persist over the life of the project. All working capital is recovered at the end of the project. Variable costs are expected to be 55% of revenue. SGA expenses are expected to be $7M per year. Athlete endorsement costs are $2M per year, with an additional $1M bonus in year 4. Other advertising and promotion costs are estimated to be: $25M, $15M, $10, $30M, $25M and $15M over the life of the project. The company has spent $2M to date in research and development. Debt used to finance the factory will have interest costs of $1.2M per year. The cost of capital for the project is 11%. The effective tax rate for the company is 40%.
Questions:
1. Should each of the following be included in the cash flow projections for the sneaker?
a. Cost of factory and purchase and installation of equipment
b. R&D costs to date
c. Cannibalization of other sneaker sales
d. Interest costs on debt issued to build the factory
e. Changes in current accounts
f. Taxes
g. Cost of goods sold
h. Advertising and promotion expenses (including endorsement fee)
i. Depreciation charges
2. What are the project cash flows?
3. What is the project NPV?
4. What is the project IRR?
Real Estate Finance and Investments
ISBN: 978-0073377339
14th edition
Authors: William Brueggeman, Jeffrey Fisher