Sneaker 2013 Case Study Analysis
In addition, the differences in the risks of both the projects have been incorporated in the discount rates as risky investments require high discount rate. The sneaker project has a discount rate of 11% whereas the persistence project has a discount rate of 14% which suggest that the persistence project is more risky.
Financial Perspective
Based on financial analysis, the persistence project appears to be more risky considering, the NPV for Sneakers project is $20.36 i.e. higher as compared to Persistence Project. Moreover, the sneaker’s project IRR is estimated at $13.84% which is significantly higher than persistence project and the discount rate of 11%. Which suggest that project will earn return beyond the expectation of the investors as discount rate is the minimum return investors expect. However, the project is likely to take 5.1 years to return the initial investment whereas persistence project’s payback period is 2.4 years.
Recommendation
From Quantitative perspectives, the persistence project appear to be risky as compared to the sneaker project as the project requires investment in immature and unfamiliar markets. In addition, the organization has lack of experience in the hiking shoe market and none of the players in the shoe industry have tapped the market. Moreover, in order to execute the project, $50 million will need to be invested in order to purchase design technology form an outside source which might result in quality reduction due to lack of control on the design of the shoe.
From Quantitative perspectives, the persistence project seems risky as a negative net present value is forecasted, the IRR is significantly lower than the discount rate and Sneaker Project and the cash flow return are considered to be inadequate and low as compared to the Sneaker Project. Therefore, it will be recommended to the business to execute the Sneaker Project as it will generate adequate return for the organization, and is likely to be successful considering, organization has expertise in the Sneaker business.
Conclusion
The two projects are surveyed and assessed based on NPV, cash flows and internal rate of return. The net present worth (NPV) of Persistence Project is lower than Sneaker Project, which suggests that the project is not feasible financially and is more risky as compared to the sneaker project.
In addition, the IRR of Persistence Project is 4.41 percent, which is lower than cost of capital of 14% which implies that the adequate returns will not be generated form the project. Therefore, it is concluded that the Sneakers 2013 project is suitable from both qualitative and quantitative points of views.............................
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