Problem 21.

Chapter 11 Cash Flow Estimation 511 Working Capital Sales are to retail customers who pay with checks or credit cards. It takes about 10 days both of these and actually receive cash. Inventories are estimated to be approximately the direct cost of two months sales. Payables are estimated as one quarter of inventories. Assume incremental cash is required equal to 2% of revenues. Accruals are insignificant. Estimate the current accounts based on the current year's sales and cost levels.. Other Items Management expects a few of the company's current male customers to be lost because they wont want to shop in a store that doesn't exclusively sell men's shoes. The gross margin impact of these lost sales is estimated to be $60,000 per year. The company has already purchased designs for certain styles of ladies' shoes for $60,000. Segwick's cost of capital is 10%. Its marginal tax rate is 35%. a. Develop a six-year forecast of after-tax cash flows for Segwick. b. Calculate the project's payback period, NPV, IRR, and PI, and make a recommendation about acceptance. c. Assume you are told that the men's shoe industry is very stable, being served by the same manufac- turers year after year. However, firms enter and leave the ladies' shoe business regularly. Would this knowledge make you more or less comfortable with the analysis you've done of this project? Why? Chapter 11 Cash Flow Estimation 511 Working Capital Sales are to retail customers who pay with checks or credit cards. It takes about 10 days both of these and actually receive cash. Inventories are estimated to be approximately the direct cost of two months sales. Payables are estimated as one quarter of inventories. Assume incremental cash is required equal to 2% of revenues. Accruals are insignificant. Estimate the current accounts based on the current year's sales and cost levels.. Other Items Management expects a few of the company's current male customers to be lost because they wont want to shop in a store that doesn't exclusively sell men's shoes. The gross margin impact of these lost sales is estimated to be $60,000 per year. The company has already purchased designs for certain styles of ladies' shoes for $60,000. Segwick's cost of capital is 10%. Its marginal tax rate is 35%. a. Develop a six-year forecast of after-tax cash flows for Segwick. b. Calculate the project's payback period, NPV, IRR, and PI, and make a recommendation about acceptance. c. Assume you are told that the men's shoe industry is very stable, being served by the same manufac- turers year after year. However, firms enter and leave the ladies' shoe business regularly. Would this knowledge make you more or less comfortable with the analysis you've done of this project? Why