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?

CASE WRITE-UP 2

Instructions: Answer all questions below. Make sure to show your work. Your answers must be typed. (TOTAL = 100 POINTS)

Sneaker 2013 Questions

Should the following be included in Sneaker 2013’s capital budgeting cash flow projection? Why or why not?

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

b. Research and development costs

c. Cannibalization of other sneaker sales

d. Interest costs

e. Changes in current asset/current liabilities accounts

f. Taxes

g. Cost of goods sold

h. Advertising and promotion expenses

i. Depreciation charges

Produce a projected capital budgeting cash flow statement for the Sneaker 2013 project by answering the following questions:

a. What is the project’s initial (year 0) investment outlay?

b. What are the project’s annual (years 2013-2018) net operating cash flows?

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

Does Sneaker 2013 appear viable from a quantitative standpoint?

To answer this question, estimate the project’s payback, net present value, and internal rate of return.

Persistence Questions

Which cash flows should be incorporated into the project’s forecast? Why or why not?

Produce a projected capital budgeting cash flow statement for the Persistence project by answering the following questions:

a. What is the project’s initial (year 0) investment outlay?

b. What are the project’s annual net operating cash flows?

c. What is the project’s terminal (2018) net cash flow?

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.

Additional Questions

Which project do you think is riskier? How do you think you should incorporate differences in risk into the analysis?