case study

Objectives:

Introduce the basic concepts of capital budgeting, including cash flow calculation and decision metrics.
Determine the cash flows appropriate to consider for a potential project.
Forecast a project’s cash flows.
Evaluate a project using payback period, net present value (NPV), and internal rate of return (IRR).
Raise the issue of how to compare projects with unequal lives.
Introduce different types of risk inherent in capital budgeting and how they are incorporated into the analysis.
Questions:(answer each)

Should the following be included in Sneaker 2013’s capital budgeting cash flow projection? Why or why not? a.Building a factory and purchase/installation of the equipment b Research and development costs c. Cannibalization of other sneaker sales d. Interest costs e. Changes in current asset/current liabilities accounts f. Taxes g. Cost of goods sold h. Advertising and promotion expenses j. Depreciation charges
Attach an Excel Spreadsheet with:
Projected cash flows statement for each project.
Payback,
IRR, and
NPV analysis.
Does Persistence appear attractive from a quantitative standpoint?
Which project do you think is more risky? How do you think you should incorporate differences in risk into your analysis?
Which project looks better for New Balance shareholders? Why?
Should Rodriguez be more or less critical of cash flow forecasts for Persistence than of cash flow forecasts for Sneaker 2013? Why?
What is your final recommendation to Rodriguez?

Solution Preview

Introduction

New balance company was going through hard times in their running shoe manufacturing industry. Although the market had big names manipulating it, Rodriguez retorted to make her company productive again. To achieve this initiative, New balance endorsed James Kirani as their brand ambassador during the Olympic games in 2012. This endorsement paid as Kirani went on to win gold in the championship.

(990 words)