UNIVERSITI UTARA MALAYSIA

BWFF2043 ADVANCED FINANCIAL MANAGEMENT (GROUP A)

SECOND SEMESTER SESSION 2019/2020 (A192)

GROUP ASSIGNMENT

SNEAKER 2013

Prepared for : Assoc. Prof. Dr. Rohani Md Rus

Prepared by : Dhayalan Chandran (259059)

: Reshana Priya Kumaresan (261060)

: Thivyaa Kalaiarasan (261182)

: Hirosha Vejian (264096)

: Shamil Bin Abdul Kadir (264171)

Submission date : 25th June 2020

1. Sneaker 2013 Project

a) Project’s initial (year 0) investment outlay

$ $
Factory outlay (150 000 000)
Equipment outlay – Purchase equipment 15 000 000
Freight and installation 5 000 000 (20 000 000)
Depreciable asset (170 000 000)
Working capital – Inventory increase 15 000 000
Account payable increase (5 000 000) (10 000 000)
TOTAL INITIAL OUTLAY (180 000 000)

b) Project’s annual (year 2013-2018) net operating cash flows

2013 2014 2015 2016 2017 2018

Million ($)
Unit 1.2 1.6 1.4 2.4 1.8 0.9
(x) price 115 115 115 115 115 115
Revenue 138 184 161 276 207 103.5
Less: loss of sales (35) (15) - - - -
Net revenue 103 169 161 276 207 103.5
Less: Variable cost (56.65 (92.95) (88.55 (151.8) (113.85) (56.925)
(55% x net revenue) ) )
Endorsement fee (2) (2) (2) (2)
Olympic bonus (2) (2) (1)
Selling, general and (7) (7) (7) (7)
administrative (7) (7)
Advertising and (15) (30) (25) (15)
promotion costs (25) (10)
Depreciation factory (7.5) (6.75) (6.45) (6)
Depreciation equipment (3.9) (6.4) (7.05) (2.4) (2.2) (1.2)
(4) (3.8)

EBIT 4.45 38.15 42.6 75.05 50.5 15.375

Tax (40%) (1.78) (15.26) (17.04 (30.02) (20.2) (6.15)
)
Net income 2.67 22.89 25.56 45.03 30.3 9.225
Add back non-cash item:
- Depreciation factory 3.9 7.5 7.05 6.75 6.45 6
- Depreciation equipment 4 6.4 3.8 2.4 2.2 1.2
NET OPERATING CASH 10.57 36.79 36.41 54.18 38.95 16.425
FLOWS
* depreciation

2013 2014 2015 2016 2017 2018 TOTAL

(million $)
Factory outlay 2.6% 5% 4.7% 4.5% 4.3% 4%
($150 million) $3.9m $7.5m $7.05m $6.75m $6.45m $6m 37.65
Equipment outlay 20% 32% 19% 12% 11% 6%
($20 million) $4m $6.4m $3.8m $2.4m $2.2m $1.2m 20

* working capital

$ $
Year 0 – Inventory increase 15 000 000
Account payable increase (5 000 000)
Net working capital 10 000 000
Year 1 – Account receivable (8% x $103m) 8 240 000
Inventory (25% x $56.65m) 14 162 500
Account payable (20% x $56.65m) (11 330 000)
Net working capital 11 072 500
Increase in working capital (Year 1 – Year 0) 1 072 500
Working to be recovered (Year 0 – increase in WC) 8 927 500

c) Project’s terminal (2018) cash flow

Million ($) Million ($)

Salvage value - Factory 102
Equipment 3 105
(-) Book value
Depreciable Asset 170
(-) total amount depreciated - factory (37.65)
equipment (20) (112.35)
Capital loss (7.35)
Tax saving (40%) 2.94

Salvage value 105

Tax on capital gain 2.94
Recapture of net working capital 8.9275
TERMINAL CASH FLOW 116.8675

d) Quantitative standpoint

 Project’s Payback
 Year Cash flow (million $) Cumulative cash flow (million $)
2012 - 0 (180)
2013 - 1 10.57 10.57
2014 - 2 36.79 47.36
2015 - 3 36.41 83.77
2016 - 4 54.18 137.95
2017 - 5 38.95 176.9
2018 - 6 16.425 3.1 / 16.425 = 0.1887
PAYBACK PERIOD = 5.1887 years

 Net Present Value ((NPV)

Year Cash flow (million $) i (11%) Discounted cash flow (million $)

2012 - 0 (180)
2013 - 1 10.57 10.57 / 1.11 9.5225
2014 - 2 36.79 36.79 / 1.112 29.8596
2015 - 3 36.41 36.41 / 1.113 26.6227
2016 - 4 54.18 54.18 / 1.114 35.6900
2017 - 5 38.95 38.95 / 1.115 23.1149
2018 - 6 16.425 16.425 / 1.116 8.7815
Total Discounted cash flow 133.5912

(-) Initial outlay 180

NET PRESENT VALUE (NPV) (46.4088)
NET PRESENT VALUE (NPV) = ($ 46 408 800)

 Internal Rate of Return (IRR)

Try at 1%

Year Cash flow (million $) Try at i = 1% Discounted cash flow (million $)

2012 - 0 (180)
2013 - 1 10.57 10.57 / 1.01 10.4653
2014 - 2 36.79 36.79 / 1.012 36.0651
2015 - 3 36.41 36.41 / 1.013 35.3392
2016 - 4 54.18 54.18 / 1.014 52.0659
2017 - 5 38.95 38.95 / 1.015 37.0596
2018 - 6 16.425 16.425 / 1.016 15.4731
Total Discounted cash flow 186.4682

Try at 2%

Year Cash flow (million $) Try at i = 2% Discounted cash flow (million $)

2012 - 0 (180)
2013 - 1 10.57 10.57 / 1.02 10.3627
2014 - 2 36.79 36.79 / 1.022 35.3614
2015 - 3 36.41 36.41 / 1.023 34.3100
2016 - 4 54.18 54.18 / 1.024 50.0539
2017 - 5 38.95 38.95 / 1.025 35.2782
2018 - 6 16.425 16.425 / 1.026 14.5849
Total Discounted cash flow 179.9511
Interpolation
i - 1% =$ 186.4682 million

i-? = $ 180 million

i - 2% = $ 179.9511 million

IRR = 1% + $186.4682 million - $180 million (1%)

$186.4682 million – $179.9511 million

IRR = 0.01 + $6.4682million (0.01)

$6.5171million

IRR = 1.99 %

INTERNAL RATE OF RETURN (IRR) = 1.99%

Based on the calculation above, the IRR is 1.99% which is less than required rate of return

amounted 11%. For payback period, this project takes 5.1887 years, which is shorter year taken

than projected 6 years. The NPV is -$46,408,800 at the end of year 6 which is less than zero.

This indicates the project would result in a net loss of $46,408,800. Besides, the NPV and IRR

calculation also indicates this project should be disregarded because investing in this project is

the equivalent of a loss. Thus, Sneaker 2013 does not viable from a quantitative standpoint.

2. Persistence Project

a) Project’s initial (year 0) investment outlay

$ $
Equipment outlay (8,000,000)
Depreciable asset (8,000,000)
Outside source outlay (1-0.4) x 50 million (30,000,000)
Working capital – Inventory and account receivable 25,000,000
 Account payable (10,000,000) (15,000,000)
TOTAL INITIAL OUTLAY (53,000,000)

b) Project’s annual (year 2013-2015) net operating cash flows

2013 2014 2015

($) ($) ($)
Shoe market - 1 x 350 million 350,000,000
1.15 x 350 million 402,500,000
1.15 x 402.5 million 462,875,000
Sales - 15% x 350 million 52,500,000
18% x 402.5 million 72,450,000
20% x 462.875 million 92,575,000
Less: Variable costs (38% x sales) (19,950,000) (27,531,000) (35,178,500)
General and administrative
expenses -12% x sales (6,300,000)
10% x sales (7,245,000)
8% x sales (7,406,000)
Advertising and promotion (3,000,000) (2,000,000) (2,000,000)
costs
Depreciation equipment
- 20% x 8m (1,600,000)
- 32% x 8m (2,560,000)
- 19% x 8m (1,520,000)

EBT 21,650,000 33,114,000 46,470,500

Tax (40%) (8,660,000) (13,245,600) (18,588,200)
Net income 12,990,000 19,868,400 27,882,300
Add - Depreciation equipment 1,600,000 2,560,000 1,520,000
NET OPERATING CASH FLOWS 14,590,000 22,428,400 29,402,300

d) Project’s terminal (2015) cash flow

($)
Salvage value 2,320,000
Tax on Capital Gain 0
Recapture of net working capital 15,000,000
TERMINAL CASH FLOW 17,320,000

*Book value = Cost (Depreciable assets) – Accumulated depreciation (equipment)

= $ 8m - $(1.6m + 2.56m + 1.52m)

 = $ 8m - $ 5.68m

= $ 2.32m

*Capital Gain= $ 2.32 m - $ 2.32m

=$0

Noted that it was sold at book value at the end of the year (2015). This bring meaning that
salvage value is equal to book value. So that, no tax effect incurred; =$ 0

e) Quantitative standpoint

 Project’s Payback Period

Year Cash flow Amount recover & balance

($) ($)
Initial CF - 0 (53,000,000)
1 – 2013 14,590,000 53,000,000 - 14,590,000 = 38,410,000
2 – 2014 22,428,400 38,410,000 - 22,428,400 = 15,981,600
3 - 2015 29,402,300 15,981,600/29,402,300
= 0.5435

PAYBACK PERIOD = 2.5435 years

 Net Present Value (NPV)

Year Cash flow I (14%) Present Value

( $) ($)
Initial CF – 0 (53,000,000)
1 - 2013 14,590,000 14,590,000/1.14 12,798,245.61
2 – 2014 22,428,400 22,428,400/1.14² 17,257,925.52
3 – 2015 29,402,300 29,402,300/1.14³ 19,845,715.01
Total Discounted cash flow 49,901,886.14
(-) Initial outlay (53,000,000)
NET PRESENT VALUE (NPV) (3,098,113.86)

 Internal Rate of Return (IRR)

Try at 10%

Year Cash flow Try at i = 10% Discounted cash flow

( $) ($)
0 (53,000,000)
1 - 2013 14,590,000 14,590,000/1.1 13,263,636.36
2 – 2014 22,428,400 22,428,400/1.1² 18,535,867.77
3 – 2015 29,402,300 29,402,300/1.1³ 22,090,383.17
Total discounted cash flow 53,889,887.30

Try at 11%

Year Cash flow (million $) Try at i = 11% Discounted cash flow

(million $)
0 (53,000,000)
1 - 2013 14,590,000 14,590,000/1.11 13,144,144.14
2 – 2014 22,428,400 22,428,400/1.11² 18,203,392.58
3 – 2015 29,402,300 29,402,300/1.11³ 21,498,708.35
Total discounted cash flow 52,846,245.07

Interpolation

i - 10% = $ 53,889,887

i -? = $ 53,000,000

i - 11 % = $ 52,846,245

IRR = 10% + $53,889,887 – $53,000,000 x (1%)

$53,889,887 – $52,846,245

=10% + $889,887 x (1%)

$1,043,642

= 10.85%

INTERNAL RATE OF RETURN (IRR) = 10.85%

Persistence does not attractive from a quantitative standpoint because the NPV for this project

is in negative at the end of year 3. Negative NPV reduce the indication value to the firm and it

will decrease the wealth of the owners. Moreover, the IRR for Persistence is 10.85% which is

less than required rate of return of 14%. Although the payback period for this project is 2.5435
years which is shorter than the preset limit, it is advisable to reject the project because investing

in this project will get a loss of $(3,098,113.86).

3. Between the two projects, which project do you think is more risky? How do you think you

should incorporate differences in risk in your analysis?

According to these two projects, the hiking shoe- Persistence is a new product line in area which

had not yet entered by New Balances. Although hiking and active walking sector was one of the

fastest growing areas of footwear but is still incurred certain risk since it is new trend.

For Sneakers 2013, this project having relatively higher short-term debt compare than

Persistence, which can make cash flow riskier because the debt has to be repaid earlier than

equity. On the other hand, the payback period of Sneaker 2013 was 2 times longer than

Persistence’s. Hence, Sneaker 2013 seems having higher risk than another project.

4. 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?

Required Rate of Return NPV IRR Payback

Sneaker 2013 11% ($46,408,800) 1.99% 5.1887 years

Persistence 14% ($3,098,200) 10.85% 2.5435 years

Based on the table above, the NPV of both projects are negative, which means both

project s should be rejected. However, the NPV of Persistence’s is higher than Sneakers 2013

project. As higher NPV are more desirable, Persistence’s project looks better for New Balance

shareholders. On the other hand, IRR of both projects are lower than their required rate of
return. This means both projects are non-profitable. Since IRR can be seen as the rate of growth

a project is expected to generate, thus Persistence project with closer IRR value with Required

Rate of Return would provide a much better chance of strong growth. Lastly, payback period

which determine how long it will take to payback the initial investment that required to

undergo a project. It is likely to go for a shorter payback period that is Persistence with only

2.5435 years as compared to Sneaker 2013 project. Thus, Persistence looks better for New

Balance shareholders.

5. Should Rodriguez be more critical or less critical of cash flow forecasts for Persistence than of

cash flow forecasts for Sneaker 2013? Why?

Forecast is depending on every year’s changes and the cash flow in cycle. Rodriguez should be

more critical of cash flow forecasts for Persistence than of cash flow forecasts for Sneaker 2013.

Based on calculation, invest in Persistence seems more profitable than Sneaker 2013, so

Rodriguez should be more critical of cash flow forecasts for Persistence.

6. What is your final recommendation to Rodriguez?

As suggestion to Rodriguez, Persistence is more desirable. This is because the IRR, NPV and also

payback period of Persistence has better performance than Sneaker 2013. If two projects are in

different period, the project with higher IRR will be chosen since the NPV of both projects are

negative. Even NPV of Persistence is negative, but it still has higher value than Sneaker 2013. In

this case, Persistence is recommended. On the other hand, Persistence has a shorter payback

period, which is better than Sneaker 2013.