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Sneaker 2013 Versus Persistence

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Sneaker 2013 versus Persistence
(1) Should the following be included in Sneaker 2013's capital budgeting cash flow
projection? Why or why not?
Building a factory and purchase/installation of equipment
Yes. This is because they are expenses that have a direct association with the
development of the shoe. In particular, they constitute the initial phase of the capital budgeting
process where capital assets such as equipment and machinery are purchased, and a facility for
production is constructed (Hostrand, 2013).
Research and development costs
No. This is because they are sunk costs, meaning that they are cash outlays that have
already been made, and they cannot be undone. Because they are costs that cannot be recovered,
they are irrelevant in a forward-looking capital budgeting decision since it only focuses on future
costs and not past ones.
Cannibalization of other sneaker sales
Yes. This is because cannibalization of other sneaker sales can be viewed as a negative
incremental impact of the new product as the sales of the new product that will be generated will
come at the expense of the older sneakers manufactured by New Balance, hence the
cannibalization effects should be factored into projected cash flows as they represent opportunity
costs.
Changes in current asset/current liabilities accounts
Yes. These changes will lead to an alteration in the company’s working capital, which is
reflected in its statement of cash flows. As such, they will have a direct impact on the cash flows.
Taxes
Yes. The company will be required to pay taxes if the project Sneaker 2013 is
implemented, which will ultimately affect its cash flows.
Cost of goods sold
Yes. This is because it comprises all the actual costs incurred in the production of the
goods/services created during a given period; hence, it has a direct association with the shoe’s
production.
Advertising and promotion expenses
Yes. This is because advertisement and promotion outlays will be solely experienced as a
result of the project, and they are future costs. Ultimately, they will affect its profitability and,
therefore, they can be classified as future cash outflows during the project appraisal.
Depreciation charges

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Yes. Depreciation charges are non-cash outlays and should ideally not affect cash flows.
Nevertheless, they are tax-deductible and, therefore, the depreciation amount paid has an impact
on the total taxes paid. As such, depreciation charges have an indirect impact on cash flows as
they lead to a reduction in the total of taxes paid. For this reason, high depreciation charges may
positively impact cash flows. Overall, therefore, they have to be adjusted for during the cash
flow calculations after taxes are taken out (Hostrand, 2013).
(4) Which project do you believe is more risky? How do you think you should incorporate
differences in risk in your analysis?
We believe that Sneaker 2013 is riskier. This is due to three main reasons. First, it needs a
higher initial investment than the Persistence project. Notably, for the production of the shoes to
occur, the firm would require an instantaneous outlay of $150 million to build a factory in
Vietnam, and the freight, as well as installation costs of the equipment, would be $5 million. For
Persistence, however, the firm would be able to utilize a section of one of the firm’s factories in
the production of the hiking shoe, and the purchasing of the manufacturing equipment would
cost $8 million. Second, a part of the project’s success will be reliant on athlete endorser Karani
James thus it could be a failure if James’s newfound fame fades or if he is involved in illegal
activity. Last but not least, even though the athletic footwear industry experienced constant
growth, there were forecasts of the demise of footwear following the economic downturn, and at
the high end of the market, new high-tech athletic footwear were being produced at a high pace.
Therefore, Sneaker 2013 would face a lot of competition from these new brands. The hiking and
active walking segment, on the other hand, was among the rapidly rising sections of the footwear
industry at the time, and there was an expectation that hiking shoes would comprise the latest
development in the footwear industry during the coming decade.
To incorporate risks in our analysis, we would create an excel comprising of different
probabilities for sales. As an example, we would give percentages for various situations ranging
from James obtaining a gold medal during the Olympics to a complete disaster situation in which
he has involvement in illegal activity.
(5) Based on the calculations you made, which project looks better for New Balance
shareholders? Why?
Project’s payback
period
NPV
IRR
Sneaker 2013
3.01 years
$162,118,584
33.57%
Persistence
2.02 years
$28,787,089
68.67%
Based on the NPV, a project with a positive NPV should be undertaken while the one
with a NPV that is negative should be rejected. Both Sneaker 2013 and Persistence have a
positive net present value thus they are both acceptable. Based on the IRR criterion, a project is
valuable if its IRR surpasses the cost of capital. For mutually exclusive projects as it is the case
with Sneaker 2013 and Persistence, the project whose IRR is the highest should be selected
(Bodnar, 2009). Persistence, therefore, should be accepted because it has a higher IRR (68.67%)

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Sneaker 2013 versus Persistence (1) Should the following be included in Sneaker 2013's capital budgeting cash flow projection? Why or why not? Building a factory and purchase/installation of equipment Yes. This is because they are expenses that have a direct association with the development of the shoe. In particular, they constitute the initial phase of the capital budgeting process where capital assets such as equipment and machinery are purchased, and a facility for production is constructed (Hostrand, 2013). Research and development costs No. This is because they are sunk costs, meaning that they are cash outlays that have already been made, and they cannot be undone. Because they are costs that cannot be recovered, they are irrelevant in a forward-looking capital budgeting decision since it only focuses on future costs and not past ones. Cannibalization of other sneaker sales Yes. This is because cannibalization of other sneaker sales can be viewed as a negative incremental impact of the new product as the sales of the new product that will be generated will come at the expense of the older sneakers manufactured by New Balance, hence the cannibalization effects should be facto ...
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