SNEAKERS 2013
Prepared byDM243025 Harsh Sanjay Jain
DM243026 Harshal Bhaskar Phalak
DM243056 Pujan Upendrakumar Shah
DM243057 Raman Gupta
DM243087 L Swaanika
DM243088 Vishweshvari Joshi
SNEAKERS ASSIGNMENT QUESTIONS

Q-1. Should the following be included in Sneaker’s 2013 capital budgeting
cash flow projection?
a)
Building a factory and purchase/installation of the equipment – Yes, purchase
of a building or factory or installation of equipment’s will be shown as an
initial outlay of cash.
b)
Research and development costs- - Research and development cost is a sunk
cost as it has already been incurred by the company and cannot be reversed.
It is a cost which will not be used for evaluating the feasibility of the project,
thus it will not be included in capital budgeting cash flow projection.
c)
Cannibalization of other sneaker sales - Yes, cannibalization of other sneaker
sales will be included in estimation of project cash flows as cannibalization
leads to loss of revenue resulting from the sale of the existing product of the
company.
d)
Interest costs – No, when cash flows relating to long term funds are being
defined, financing costs like interest costs should be excluded as these costs
are reflected in the weighted average cost of capital. Hence, if interest cost
is deducted then, the cost of long-term debts will be counted twice.
e) Changes in current asset/current liabilities accounts – Yes. While evaluating a
project, working capital requirements should be treated as cash outflow and at
the end of the project its release should be treated as cash inflow. Therefore,
changes in current assets and current liability will be shown.
f) Taxes- Yes, tax is included in the estimation of project cash flow as every
business has an obligation to pay tax on its earnings before tax to the
government.
g) Cost of goods sold – Yes, COGS will be included in the capital budgeting
cashflow projection because it represents all of the costs and expenses directly
related to the production of goods.
h) Advertising and promotion expenses - Advertising and promotional expenses is
an incremental overhead cost, thus, it will be attributable to the project for cash
flow estimation in capital budgeting.
i) Depreciation charges – Yes, depreciation is a non cash item and itself does not
affect the cash flow. However, we must consider tax shield or benefit from
depreciation in our analysis. Since this benefit reduces cash outflow for taxes, it
is considered as cash inflow.
Q-2) Produce a projected capital budgeting cash flow statement for the
Sneaker 2013 project by answering the following:
a. What is the project’s initial (year 0) investment outlay?
Ans) Projects initial investment outlay is $180 million.
b. What is the project’s annual (years 2013-2018) net operating cash flows?
Ans) Projects net operating cashflows are:2013
$10.57 million
2014
$36.79 million
2015
$29.32 million
2016
$55.04 million
2017
$26.59 million
2018
$23.84 million
c. What are the project’s terminal (2018) net-operating net cash flow?
Ans) Projects terminal cashflow is $140.99 million
d. 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.
Ans) Yes, Sneaker 2013 appear viable from a quantitative point of view because
the project has a positive NPV of $8.23 million and an IRR of 12.16% and a
payback period of 5.15 years.
PERSISTANCE ASSIGNMENT QUESTIONS

Q-1) Which cash flows should be incorporated into the project’s forecast? Why
or why not?
a) Purchase of equipment and technology- Yes, purchase of a building or factory
or installation of equipment’s will be shown as an initial outlay of cash.
b) Idle section overhead allocation- Since, this cost will be incurred irrespective
of the fact that the project is undertaken or not, thus it is a sunk cost. It will not
be included in cash flow projection for capital budgeting.
c) Depreciation charges – Yes, depreciation is a non cash item and itself does not
affect the cash flow. However, we must consider tax shield or benefit from
depreciation in our analysis. Since this benefit reduces cash outflow for taxes, it
is considered as cash inflow.
d) Change in Working capital (Current assets - Current Liabilities) - Yes. While
evaluating a project, working capital requirements should be treated as cash
outflow and at the end of the project its release should be treated as cash
inflow. Therefore, changes in current assets and current liability will be shown as
a cash flow in capital budgeting.

e) Variable Cost- Variable Cost is included in the cash flow projection for
capital budgeting as it is a incremental expense for a company.

f) General and administrative expenses & Advertisement and Promotion CostSince both are an incremental overhead cost, thus, it will be attributable to
the project for cash flow estimation in capital budgeting.

g) Taxes- Yes, tax is included in the estimation of project cash flow as every
business has an obligation to pay tax on its earnings before tax to the
government.

h) Interest costs – No, when cash flows relating to long term funds are being
defined, financing costs like interest costs should be excluded as these costs
are reflected in the weighted average cost of capital. Hence, if interest cost
is deducted then, the cost of long-term debts will be counted twice.
Q-2) Produce a projected capital budgeting
cash flow statement for the Persistence
project by answering the following:

What is the project’s initial (year 0) investment outlay?
Ans-)$53 million

What are the project’s annual net operating cash flows?
2013 $14.59 million
2014 $22.43 million
2015 $29.4 million

What is the project’s terminal (2018) net cash flow?
Ans-) Projects terminal cashflow is $40.72 million
Q-3) 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.

Ans-) Yes, Persistence appears to be attractive from a quantitative standpoint
as it has a positive NPV of $4.54 million, IRR of 18.26% and a payback period
of 2.39 years.
Additional Assignment Questions

1. Which project do you think is more risky? How do you think you should
incorporate differences in risk into your analysis?
Ans) In order to find the better project between sneaker 2013 and persistence
we have build an equivalent annual benefit model. By analyzing both of them we
find that risk is almost same for both the projects but still the equivalent annual
benefit is more in the case of Persistence project and so is IRR and MIRR so we
choose the persistence project.

2. What is your final recommendation to Rodriguez?
Ans) Final recommendation to Rodriguez would be to invest in Persistence
project.
THANK YOU !!!