Answer No. 1
For capital budgeting cash flow projection of project “Sneaker 2013”, we will include all of the following,
- Building a factory and purchase/ installation of the equipment because New Balance is incurring these expenses solely for the purpose of undertaking the project “Sneaker 2013”.
- Research and development is also done for the project’s feasibility, so its cost should also be included.
- Cannibalization cost will also be considered while finding cash flows, this is opportunity cost of undertaking the project.
- Interest cost, related to financing undertaken for the project will also considered.
- All the changes in current asset and current liability account will aslo be considered, which are solely changed due to project.
- Taxes shall also be included, as every business has an obligation of paying taxes on earnings.
- Cost of goods sold of specific project will also be included in finding net income.
- Advertising and promotion cost incurred for the project will also be included.
Answer No. 2
Following are the consolidated results of NPV, IRR and pay back period.
| "Sneaker 2013" FCF,NPV and IRR (amounts in $) | |||||||
| Items | Initial | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 |
| Cash Flow for the period/ FCF | $ (180,000,000) | $ 26,452,000 | $ 82,668,000 | $ 76,082,000 | $ 125,582,000 | $ 86,234,000 | $ 152,016,000 |
| Cannibalization effect | $ (35,000,000) | $ (15,000,000) | |||||
| Net a Cash Flow for the period/ FCF | $ (180,000,000) | $ (8,548,000) | $ 67,668,000 | $ 76,082,000 | $ 125,582,000 | $ 86,234,000 | $ 152,016,000 |
| Discount cash flows | $ (180,000,000) | $ (7,700,901) | $ 54,920,867 | $ 55,630,503 | $ 82,724,753 | $ 51,175,682 | $ 81,273,961 |
| NPV | $ 138,024,865 | ||||||
| IRR | 15% | ||||||
| Discount rate | 11% | ||||||
| Pay back period | $ (180,000,000) | $ (188,548,000) | $ (120,880,000) | $ (44,798,000) | $ 80,784,000 | ||
| 0.643276903 | |||||||
| 4.3 | months | ||||||
| 128 | days | ||||||
| Total Payback period | 3years and 128 days | ||||||
Sneaker 2013 Harvard Case Solution & Analysis
Answer No.3
For “Persistence” project, all the variables except cannibalization and building and factory cost.
As because there is no any effect of cannibalizing if persistence project is undertaken and also it don’t require any new factory building, as cost of existing building is fixed, irrespective of New Balance’s decision to undertake the project. So following will be included.
- Equipment cost which New Balance is incurring solely for the purpose of undertaking the project “Persistence”.
- Research and development is also done for the project’s feasibility, so its cost should also be included.
- Cannibalization cost will also be considered while finding cash flows, this is opportunity cost of undertaking the project.
- Interest cost, related to financing undertaken for the project will also considered.
- All the changes in current asset and current liability account will aslo be considered, which are solely changed due to project.
- Taxes shall also be included, as every business has an obligation of paying taxes on earnings.
- Cost of goods sold of specific project will also be included in finding net income.
Advertising and promotion cost incurred for the project will also be included........................
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