Sneakers 2013

i)Estimate the initial outlay

Initial Outlay

Cost of Asset ($15,000,000)

Freight and Installation ($5,000,000)
Depreciable asset ($20,000,000)
Inventory increased ($15,000,000)
Account Payable increased $5,000,000
Investment in NWC ($20,747,500)
Net Initial Outlay ($50,747,500)

ii)Estimate the annual cash flow and the terminal cash flow

Annual Cash Flows

2013 2014 2015 2016 2017 2018
Revenue $193,000,000 $289,000,000 $266,000,000 $456,000,000 $342,000,000 $171,000,000
Increased in :
Selling, general and administration ($7,000,000) ($7,000,000) ($7,000,000) ($7,000,000) ($7,000,000) ($7,000,000)
Endorsement cost ($2,000,000) ($2,000,000) ($2,000,000) ($3,000,000) ($2,000,000) ($2,000,000)
Advertising and promotion cost ($25,000,000) ($15,000,000) ($10,000,000) ($30,000,000) ($25,000,000) ($15,000,000)
Variable cost ($106,150,000) ($158,950,000) ($146,300,000) ($250,800,000) ($188,100,000) ($94,050,000)
Research and development ($2,000,000) - - - - -
Increased depreciation ($4,000,000) ($6,400,000) ($3,800,000) ($2,400,000) ($2,200,000) ($1,200,000)
EBT $46,850,000 $99,650,000 $96,900,000 $162,800,000 $117,700,000 $51,750,000
Taxes (40%) ($18,740,000) ($39,860,000) ($38,760,000) ($65,120,000) ($47,080,000) ($20,700,000)
EAT $28,110,000 $59,790,000 $58,140,000 $97,680,000 $70,620,000 $31,050,000
Depreciation Revesal $4,000,000 $6,400,000 $3,800,000 $2,400,000 $2,200,000 $1,200,000
Annual Cash flow $32,110,000 $66,190,000 $61,940,000 $100,080,000 $72,820,000 $32,250,000

Terminal Cash Flow

Salvage Value $3,000,000
Tax On Sales New Assets (40%) ($1,200,000)
After-tax proceeds from sale of new
asset $1,800,000
Recapture of NWC $20,747,500
Terminal Cash Flow $24,347,500

ii)Estimate the NPV

NPVs
Year Cash Flow
0 ($50,747,500) Discount Rate = 11%
2013 $32,110,000
2014 $66,190,000
2015 $61,940,000
2016 $100,080,000
2017 $72,820,000
2018 $32,250,000
NPV = 18460000(PVIF11%,1 yr.)+37840000(PVIF11%,2yr)+33590000((PVIF11%,3 yr.) + 51480000(PVIF11%,4 yr.)+36370000(PVIF11%,5 yr.)
+(14025000+10,886,400)(PVIF11%,6 yr.)-50747500
= 28931110+53733042+45312207+61429104+39570388+27229057.25-50747500
= 256204908-50747500
= $205,457,408

Conclusion:
The initial cash outlay is the amount paid to start the project or the investment.
The result is in the negative amount (-$50,747,500) because large initial capital investment is made by the organization for the purpose of generating
the future positive cash flow in return.
Net Present Value (NPV) is the difference of the total cash inflows and the total cash outflows of the project.
The net cash flow is then discounted by the rate of cost of capital.
This technique incorporates all the relevant future cash flow making it more viable in the investment appraisal tools.

The NPV of the Sneakers project is $205,457,408 so we would accept the project.
CALCULATION:

Estimated sales volumes 2013 2014 2015 2016 2017 2018

Pairs sold (million) $1,200,000 $1,600,000 $1,400,000 $2,400,000 $1,800,000 $900,000
Each pair $190 $190 $190 $190 $190 $190
total sales $228,000,000 $304,000,000 $266,000,000 $456,000,000 $342,000,000 $171,000,000
Lost sales ($35,000,000) ($15,000,000) - - - -
After lost sales/Revenue $193,000,000 $289,000,000 $266,000,000 $456,000,000 $342,000,000 $171,000,000
Gross Profit $77,200,000 $115,600,000 $106,400,000 $182,400,000 $136,800,000 $68,400,000
Gross Margin 40% 40% 40% 40% 40% 40%

Variable cost = 55% of revenue

Total cost = $106,150,000 $158,950,000 $146,300,000 $250,800,000 $188,100,000 $94,050,000

Account Receivable = 8% of Revenue

Account Receivable = $15,440,000

Account payable = 20% of Variable cost

Total Account payable = $21,230,000

Inventory = 25% of Variable cost

Total Inventory = $26,537,500

Net Working Capital = $20,747,500

 Depreciation Expenses
Year 2013 2014 2015 2016 2017 2018
Depreciation Percentage 20% 32% 19% 12% 11% 6%
Equipment (At Cost) 20,000,000 $4,000,000 $6,400,000 $3,800,000 $2,400,000 $2,200,000 $1,200,000
Acc. Dep. $4,000,000 $10,400,000 $14,200,000 $16,600,000 $18,800,000 $20,000,000

Depreciation factory
Year 2013 2014 2015 2016 2017 2018
Depreciation Percentage 2.60% 5% 4.70% 4.50% 4.30% 4%
At Cost, 150,000,000 $3,900,000 $7,500,000 $7,050,000 $6,750,000 $6,450,000 $6,000,000
Acc. Dep. $3,900,000 $11,400,000 $18,450,000 $25,200,000 $31,650,000 $37,650,000