Sneakers 2013 Project Harvard Case Solution & Analysis

Sneakers 2013 Project Case Study Help

Discounted Cash flows:

for the determination of the project’s net present value, the cash flows occurring during the life of the project are discounted using a rate of 14%. As a result of discounting the cash flows, the NPV of the project worth $10.4 million is estimated.

Profitability Index:

It is estimated that the Persistence project will achieve profitability index of 18% which is based on the cash flow’s present values and initial investment of $58 million as the working capital is already incorporated in the project’s cash flows in future. The profitability index estimated indicates that only 18% of the initial investment will be recovered if the project is undertaken. (See Appendix)

1. Sensitivity Analysis:

In order to perform sensitivity analysis of the project, the discount rate of 14% is used in evaluating the project has been increased and decreased by 4%. The discount rate sensitivity indicates the variation in the NPV of the project as a result of changes in the discount rate. The increase in the discount rate by an approximate of 4%, the NPV of the project will increase to $14.5 million as compared to the estimated NPV of the project worth $10.4 million. Similarly, the NPV of the project will decrease to $5.68 million as a result of decreasing the discount rate by 4%. (See Appendix)

Alternative Analysis

Sneakers 2013 Project:

Before deciding which project to pursue in the near future to generate profit and t seize the market share, the company should assess the benefits and drawbacks of launching Sneakers in the market which are listed below;

Pros

• A six-year life project with traditional or customary project cash flows
• The positive net present value shows that huge amount of dollar value would be added to the project.
• The lower discount rates implies the lower project’s uncertainty and higher present value of project‘s cash flows.

Cons

• The project could not be completed without input from marketing, sales, and manufacturing, finance & technology engineers.
• The cash flow of project includes the risk of endorsing the product for the promotion means.
• The large amount of investment is required to execute the project

Persistence Project:

Pros

• The small amount of initial investment is neededfor the execution of the project.
• The execution of the project would permit the company to drive the high value proposition, improve brand identity & competitive edge through launching the product and tap the new market segmentbefore market competitors.
• The time required to recover the investment cost is 2 years and 2 months which is lower as compared to Sneakers 2013 project, hence the shorter investment implies a more attractive investment.

Cons

• A hiking shoe project in a more unfamiliar market segment
• The higher discount rates implies the greater project’s uncertainty and lower cash flow’ present value.
• Due to the lack of experience in the field, there is less chances to reap the financial benefits in an unfamiliar marketplace.

Recommendation

In consideration of the quantitative analysis, the Persistence Project is more risky than Sneakers 2013 because the market is unfamiliar, immature and new. Also, the company has enough experience and expertise in the field of market of Sneaker shoe. Another issue is that the company would need to purchase the manufacturing specification and design technology in the hiking shoe from an outside source for the investment of 50 million dollars, this need to be considered the risky investment for the company.

From the quantitative standpoint, the net present value (NPV)of Sneakers 2013 Project is greater than zero or higher than Persistence Project which makes the project feasible and implies the profitability of the project or projected investment.Furthermore, the IRR of the project is 24.4% which is greater than IRR of Persistence project which implies the greater amount by which it would be exceeded to the weighted average cost of capital and generate higher series of cash inflows to the company. On the other hand, the IRR of Persistence Project is 5.89 percent which is not greater than cost of capital i.e. 14% which means that the economic returns would not better off as compared to the initial cost of capital. Thus, the Sneakers 2013 project is viable from both qualitative and quantitative standpoints. Investing in Sneakers 2013 project would allow the company to maximize the wealth of the investors.

Conclusion

Taking into consideration the feasibility of both projects, the basic concepts of the capital budgeting are used including decision metrics and cash flow calculations. Both projects are assessed and evaluated based on NPV, cash flow streams and internal rate of return. The net present value (NPV) of Persistence Project is lower than Persistence Project which does not makes the project feasible and implies the unfeasibility of the project or projected investment. On the other hand, the IRR of Persistence Project is 5.89 percent which is not greater than cost of capital i.e. 14% which means that the economic returns would not better off as compared to the initial cost of capital. Thus, the Sneakers 2013 project is viable from both qualitative and quantitative standpoints.............................

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