1. Should the following be included in Sneaker 2013's capital budgeting cash flow projection?

Why or why

a. Building a factory and purchase / installation of the equipment.

No, this should not be included in cash flow projection. Building a factory and purchasing an
equipment is a capitalisation, not an expenses. This should be include in balance sheet instead.

b. Research and development cost.

No, just like building a factory, the cost of R&D is an investment. Thus, it should be treated as
capitalisation instead of expenses.

c. Cannibalization of other sneaker sales.

No, cannibalization of other sneaker sales should not include in cash flow projection. This is
because it will be reflected on reduction of sales at the beginning.

d. Interest costs
Yes, interest cost should be included in cash flow projection. This is one of the expenses
involves cash outflows.

e. Changes in current asset/ current liabilities accounts

Yes, changes in short-term assets and liabilities will usually involve cash outflow and inflow.
Hence, it should be included in cash flow projection.

f. Taxes
Yes, taxes should be included in cash flow projection. The gross operating income need to be
deducted with tax to become net income.

g. Cost of goods sold

Yes, cost of goods sold should be included. The total sales or revenue need to be deducted with
cost of goods sold before come to gross sale or revenue.

h. Advertising and promotion expenses

Yes, one-off expenses should be included in cash flow projection. This is because it involves
cash payment and it is an expenses of operation.

i. Depreciation Charges
No, depreciation charges is not an actual cash outflow, hence not need to include in cash flow
projection.
w projection? Why or why not?
a. What is the project's initial (year 0) investment outlay?
Initial Ivestment Outlay
Cost of Factory 150,000,000
Cost of Equipment & Installation 20,000,000
Working Capital
Inventory 15,000,000
Account Payable (5,000,000)
Initial Ivestment Outlay 180,000,000

b. What are project's annual (years 2013-2018) net operating cash flows?
Year 2013 2014 2015
Sales Price 190 190 190
Cost 114 114 114
Gross Margin 76 76 76

Pairs Sold 1,200,000 1,600,000 1,400,000

Sales 228,000,000 304,000,000 266,000,000

(Lost Sales) 35,000,000 15,000,000
Sales Increment 193,000,000 289,000,000 266,000,000
Gross Margin 77,200,000 115,600,000 106,400,000

Expenses
Selling, General Admin Expenses 7,000,000 7,000,000 7,000,000
Kirani James Payment 2,000,000 2,000,000 2,000,000
A&P expenses 25,000,000 15,000,000 10,000,000
Interest Cost 1,200,000 1,200,000 1,200,000
Depreciation
Factory (150 million) 3,900,000 7,500,000 7,050,000
Equipment (20 million) 4,000,000 6,400,000 3,800,000
39-year MACRS 0.026 0.050 0.047
5-year MACRS 0.200 0.320 0.190
Total Expenses 43,100,000 39,100,000 31,050,000

EBT 34,100,000 76,500,000 75,350,000

Less: Tax (40%) 13,640,000 30,600,000 30,140,000
EAT 20,460,000 45,900,000 45,210,000
Add: Depreciation 7,900,000 13,900,000 10,850,000
Net Operating Cash Flow 28,360,000 59,800,000 56,060,000

c. What is the project's terminal (2018) non-operating net cash flow?

Book Value Factory Equipment

Cost 150,000,000 20,000,000
Less depreciation 37,650,000 20,000,000
Book Value 112,350,000 0

Salvage Value
 Factory 102,000,000
Equipment 3,000,000 105,000,000
Less Depreciation Charged 7,350,000
Taxes saving (40%) 2,940,000
Non-operating net cash flow 107,940,000

d. Does Sneaker 2013 appear viable from a quantitative standpoint? To answner this question, etimate the project's pay
year Cash Flow Cumulative CF
2012 0 (180,000,000)
2013 1 28,360,000 28,360,000
2014 2 59,800,000 88,160,000
2015 3 56,060,000 144,220,000
2016 4 88,380,000 232,600,000
2017 5 64,420,000 297,020,000
2018 6 28,800,000 325,820,000

Initial Outflow 180,000,000 Discount rate 11%

Payback Period = the last year with negative cash flow + (Amount of
cash flow at the end of that year / Cash flow during the year after
that year) NPV =

Payback period = 3+(180000000-144220000)/88380000

= 3.4048 years IRR =
 2016 2017 2018
190 190 190
114 114 114
76 76 76

2,400,000 1,800,000 900,000

456,000,000 342,000,000 171,000,000

456,000,000 342,000,000 171,000,000

182,400,000 136,800,000 68,400,000

7,000,000 7,000,000 7,000,000

3,000,000 2,000,000 2,000,000
30,000,000 25,000,000 15,000,000
1,200,000 1,200,000 1,200,000

6,750,000 6,450,000 6,000,000

2,400,000 2,200,000 1,200,000
0.045 0.043 0.040
0.120 0.110 0.060
50,350,000 43,850,000 32,400,000

132,050,000 92,950,000 36,000,000

52,820,000 37,180,000 14,400,000
79,230,000 55,770,000 21,600,000
9,150,000 8,650,000 7,200,000
88,380,000 64,420,000 28,800,000
uestion, etimate the project's payback, net present value, and internal rate of return.
PV
(180,000,000)
25,549,550
48,535,022
40,990,589
58,218,643
38,230,135
15,397,656

46,921,594

19%
 Persistence: Assignment
1 Which cash flows should be incorporated into the project's forecast? Why or why not?

Should incorporate cash flow as below:

1.Building a factory and purchasing/installing equipment because is it related to project.
2.Cannibalising of other sneaker sales because sales of older shoes will decline and the varia
3.Changes in the current asset/current liability accounts, as this will have a direct impact on
4.Cost of goods sold, direct cost to shoe
5.Advertising and promotion expenses is a direct expense of the product
Should no incorporate cash flow as below:
1.Research and development costs, because it is sunk cost
2.Overhead allocation, it is sunk cost and will incur if project no start
Produce a projected capital budgeting cash flow statement for the Persistence project by answering the fo
2

A What is the project's initial (year o) investment outlay?

Initial Investment Outlay Million Million
Capital Expenditure
Equipment Cost 8
Design Technology 50 58

Working Capital
Inventory & account 25
Account Payable (10) 15
Initial Investment Outlay 73

B What are the project's annual net operating cash flows?

2,013 2,014 2,015
Sales 402,500,000 474,950,000 569,940,000
Variable Cost 152,950,000 180,481,000 216,577,200
Gross Margin 249,550,000 294,469,000 353,362,800
General & Administrativ 29,946,000 29,446,900 28,269,024
Advertising & Promotion 3,000,000 2,000,000 2,000,000
Design Technology 50,000,000
Depreciation 1,600,000 2,560,000 1,520,000
EBIT 165,004,000 291,909,000 351,842,800
Interest 600,000 600,000 600,000
EBT 164,404,000 291,309,000 351,242,800
Taxes (40%) 65,761,600 116,523,600 140,497,120
Net Income 98,642,400 174,785,400 210,745,680
Depeciation 1,600,000 2,560,000 1,520,000
Net Operating Cash Flo 100,242,400 177,345,400 212,265,680
C What is the project's terminal (2018) net cash flow?
Book Value of Equipment
Purchase Price 8,000,000
Depreciation 5,680,000 2,320,000

Working Capital
Inventory & account 25,000,000
Account Payable 10,000,000 15,000,000
Terminal Cash Flow 17,320,000

3 Does Persistence appear attractive from a quantitative standpoint? To answer this

question, estimate the project's payback, net present value, and internal rate of return.

Year CF Cumulative CF PV factor 14 PV

0 (73,000,000) (73,000,000) 1 (73,000,000)
1 100,242,400 27,242,400 1 23,896,842
2 177,345,400 204,587,800 1 157,423,669
3 229,585,680 434,173,480 1 293,054,732

Payback Period= 1 year

NPV= 401,375,243

IRR= 117.16%

From a quantitative standpoint we find that persistence is also attractive.

Why or why not?

related to project.
l decline and the variable cost will begin to decrease as production of this shoe is slowed.
ve a direct impact on cash flows.

project by answering the following:

1) Which project do you think is riskier? How do you think you should incorporate differences in risk
into your analysis? 
By doing comparison of two project which is the Net Present Value (NPV) of Sneakers and Persistence. The
NPV of Sneakers is greater than the NPV of Persistence. Not only tha, the IRR of Sneakers also lower than
the IRR of Persistence. Hence, the project Sneakers is riskier than project Persistence. While, 3 years need to
be extended to 6 years. 

2) Based on the calculated payback period, net present value (NPV), and internal rate of return (IRR)
for each project, which project looks better for New Balance shareholders? Why? 
By doing comparison of two project which is the payback period of Sneakers is greater than payback period
of Persistence. Besides, based on the NPV of Sneakers greater than the NPV of Persistence and the IRR of
Sneakers also lower than the IRR of Persistence. Hence, the project of Persistence is better for New Balance
shareholders.

3) Should Rodriguez be more or less critical of cash flow forecasts for Persistence than of cash flow
forecasts for Sneaker 2013? Why? 
Yes, Rodriguez should be more critical of cashflow forecasts of Persistence because the forecast is
dependent on every year’s growth percentage changes. Persistence is expecting the growth rate to increase
each year which is highly unlikely in the real world. 

4) What is your final recommendation to Rodriguez? 

Success would depend on an effective marketing and advertising campaign which targeted not only the
younger consumer but which reached the ultimate purchaser who was more likely to be a parent. In addition,
as an investor, they should think more about NPV and IRR. So, the final recommendation is project of
Persistence to Rodriguez.
 differences in risk

and Persistence. The
ers also lower than
hile, 3 years need to

ate of return (IRR)

han payback period

ce and the IRR of
er for New Balance

han of cash flow

forecast is
th rate to increase

ed not only the

a parent. In addition,
n is project of