SNEAKER 2013 CAPITAL BUDGETING Case Solution
Answer 4:
In the following table the NPV, IRR and the payback period of the persistence project is mentioned.
| "Persistence" FCF,NPV and IRR (amounts in $) | ||||
| Items | initial | 2013 | 2014 | 2015 |
| Net a Cash Flow for the period/ FCF | $ (23,000,000) | $ (53,360,000) | $ 43,542,400 | $ 81,192,800 |
| Discounted Cash Flows | $ (23,000,000) | $ (46,807,018) | $ 33,504,463 | $ 54,802,827 |
| NPV | $ 18,500,273 | |||
| IRR | 13% | |||
| Cost of capital | 14% | |||
| Payback period | $ (23,000,000) | $ (46,807,018) | $ 33,504,463 | $ 54,802,827 |
| $ (23,000,000) | $ (69,807,018) | $ (36,302,555) | $ 18,500,273 | |
| Total Payback period | 2.045667257 | |||
Answer 5:
After conducting the financial projection of each projects separately through capital budgeting method it is analyzed that the persistence project is more risky then the sneaker 2013 project. The reason of the persistence project to be risky is that the IRR of that particular project is less than the cost of capital of the persistence project. Due to lower IRR than cost of capital the persistence project incorporate loss in the first year. Also the company does not have experience in selling and marketing hiking shoes. The payback period of the persistence project completed in the last year of the project whereas the payback period of the sneakers 2013 is ended before 3 years of the project completion which provides us the information that the sneaker 2013 is less risky project than the persistence project. Hence, after estimating the financial projections to calculate NPV it is also identified that the NPV of the sneaker 2013 project is greater than the persistence project which also created an attractiveness towards the sneaker 2013 project.
All those financial projection which includes NPV, IRR and payback period for each projects are used to evaluate the risk in both the projects. The difference in these projections when compared with each other indicated that the persistence project is more risky than the sneakers 2013 project. The difference in these parameters after the calculation of capital budgeting of each project are incorporated as the risk factor associated with each project.
Answer 6:
The financial projections which are estimated by implementing the capital budgeting method, the project which looks better for new balance shareholders is the sneaker 2013 project. The reason of attractiveness towards the sneaker 2013 project is its NPV which is positive and greater than the NPV of persistence project. The IRR of sneaker 2013 project is also greater than the IRR of persistence project. Although the shareholder prefer the project for the company which provides greater value to their investment and increased the value of their shares. Therefore the project with greater NPV is the sneaker 2013 project which provides the maximum value to the shareholders and therefore is the project which will be preferred by the shareholders and looks better for the shareholders.
Answer 7:
Forecasting cash flows are critical for both the projects. Rodriguez should be more critical about the forecasting of persistence project rather than the sneaker project. The reason for being critical for Rodriguez about the persistence project is the forecasting period which is projected in estimating the future cash flows and financial projection of this particular project. The forecasting period of the sneaker 2013 project is 6 years which is greater than the persistence project which make more critical to Rodriguez regarding persistence project in terms of the time allocated to each project regarding their valuation and forecasting.
Answer 8:
The final recommendation to Rodriguez is to accept the sneaker project. After analyzing all the financial projections through capital budgeting process i.e. NPV, IRR and payback period the sneaker 2013 project is appeared to be more attractive in terms of future projection estimated through capital budgeting process. The NPV and IRR are both greater in sneaker project 2013 in comparison with the persistence project. Hence the sneaker 2013 project provides more value to the company which will create more value for the shareholders of the company. Accepting this project will eventually increase the value of the company which in return will increase the share value of the company. This increase in share value will increase the share price of the company through which shareholders will get benefit of accepting that project. Therefore the Rodriguez should go for the sneaker 2013 project............
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