Question 1: Identify all the relevant cash flows.

Answer 1: The relevant cash flows are that which should be included in a capital budgeting
analysis that will only occur if the project is accepted. In this case of Sneakers 2013, the below are
the relevant cash flows:

1. Initial investment to build the factory = $150 Million

2. Initial investment to purchase equipment and for freight and installation = $20 Million
3. Inventory Purchase = $15 Million
4. Accounts Payable = $5 Million
5. Lost Sales = $35 Million in 2013 and $15 Million in 2014
6. Kirani James Endorsement = $2 Million per year and an additional bonus in 2016 of $1
Million during Olympics.
7. Interest costs = $1.2 Million per year for the debt which is taken for manufacturing Sneaker
2013.

Question 2: What is the project initial investment?

Answer 2:

2012 (Year 0)
Investments:
1 Factory outlay -15,00,00,000
2 Equipment -1,50,00,000
3 Freight and Installation of the Equipment -50,00,000
4 Inventory increased (CA) -1,50,00,000
5 Accounts Payable increased (CL) 50,00,000
6 Net working capital (CA-CL) 1,00,00,000
7 Change in net working capital -1,00,00,000
Total Intial Investment (Factory
8 outlay+equipment+F&I+change in net working capital -18,00,00,000

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Question 3: What are the project’s annual net operating cash flows for the year (2013-2018)?

Answer 3:

Total Sales = Quantity

Year Quantity Sold Price ($)
Sold*Price
2013 12,00,000 115 13,80,00,000
2014 16,00,000 115 18,40,00,000
2015 14,00,000 115 16,10,00,000
2016 24,00,000 115 27,60,00,000
2017 18,00,000 115 20,70,00,000
2018 9,00,000 115 10,35,00,000

Year 2013 2014 2015 2016 2017 2018

Depreciation % 20 32 19 12 11 6
Equipment at cost $20000000 40,00,000 64,00,000 38,00,000 24,00,000 22,00,000 12,00,000
Accumulated depreciation 40,00,000 1,04,00,000 1,42,00,000 1,66,00,000 1,88,00,000 2,00,00,000
Adjusted basis of equipment after depreciation 1,60,00,000 96,00,000 58,00,000 34,00,000 12,00,000 -

Year 2,013 2,014 2,015 2,016 2,017 2,018

Depreciation % 3 5 5 5 4 4
Factory at cost $150000000 39,00,000 75,00,000 70,50,000 67,50,000 64,50,000 60,00,000
Accumulated depreciation 39,00,000 1,14,00,000 1,84,50,000 2,52,00,000 3,16,50,000 3,76,50,000
Adjusted basis of factory after depreciation 14,61,00,000 13,86,00,000 13,15,50,000 12,48,00,000 11,83,50,000 11,23,50,000

Equipment cost = 2,00,00,000

Factory cost = 15,00,00,000

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 2013 2014 2015 2016 2017 2018
Total Sales 13,80,00,000 18,40,00,000 16,10,00,000 27,60,00,000 20,70,00,000 10,35,00,000
Calculation for Lost sales 35*(1-0.4) 15*(1-0.4)
Lost Sales
(Canabalization) -2,10,00,000 -90,00,000

Sales Revenues 11,70,00,000 17,50,00,000 16,10,00,000 27,60,00,000 20,70,00,000 10,35,00,000

Increase in Particulars
because of this Project:

Selling, General &

Administrative expenses -70,00,000 -70,00,000 -70,00,000 -70,00,000 -70,00,000 -70,00,000
Endorsement -20,00,000 -20,00,000 -20,00,000 -30,00,000 -20,00,000 -20,00,000
A&P expense -25000000 -15000000 -10000000 -30000000 -25000000 -15000000
Variable cost ( 55% of
Revenues) -6,43,50,000 -9,62,50,000 -8,85,50,000 -15,18,00,000 -11,38,50,000 -5,69,25,000
Depreciation (Factory and
Equipment) -79,00,000 -13900000 -10850000 -9150000 -8650000 -7200000
Factory salvage value 10,61,40,000
Equipment salvage value 18,00,000
Working Capital
Requirements:
Inventory -1,60,87,500
Accounts payable -1,28,70,000
Accounts Receivable -93,60,000
Working capital invested -1,25,77,500
Increase in working
capital -25,77,500
Working Capital
recovered -74,22,500
EBT 81,72,500 4,08,50,000 4,26,00,000 7,50,50,000 5,05,00,000 11,58,92,500
Taxes ( Effective rate@
40%) -3269000 -16340000 -17040000 -30020000 -20200000 -46357000
PAT 49,03,500 2,45,10,000 2,55,60,000 4,50,30,000 3,03,00,000 6,95,35,500
Depreciation Reversal 79,00,000 13900000 10850000 9150000 8650000 7200000
Annual Net cash flow 1,28,03,500 3,84,10,000 3,64,10,000 5,41,80,000 3,89,50,000 7,67,35,500

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Question 4: What is the project terminal cash flows?

Answer 4:

Terminal Cash Flows

Salvage value (Factory) 10,20,00,000

Tax on sale of Factory (Proceeds*Tax
rate) -41,40,000

After tax proceeds from Sale of

Factory (I) 10,61,40,000
Salvage value (Equipment) 30,00,000
Tax on sale of Equipment
(Proceeds*Tax rate) 12,00,000

After tax proceeds from Sale of

equipment (II) 18,00,000

After tax proceeds from sale of assets +

Terminal cash flow = Working capital recovered

Net Working capital = Current Assets- Current Liabilities

Current Assets
Accounts Receivable = 8% of Revenue = 0.08* 117000000 93,60,000
Inventory = 25% of variable cost = 0.25* 64350000 1,60,87,500
Current Liabilities
Accounts Payable = 20% of variable cost = 0.2* 64350000 1,28,70,000

Net working capital = CA-CL = 1,25,77,500

Net Working Capital Recovered (III) = 74,22,500

Terminal cash Flow = (I)+(II)+(III) 11,53,62,500

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Question 5: Evaluate the project using the NPV, IRR, Payback, PI and discounted payback
methods.
Answer 5:
Cash Flow ( in $
Year million)
0 -180
1 12.8035
2 38.41
3 36.41
4 54.18
5 38.95
6 76.7355

Discount rate = 11%

By using Excel formula :
NPV= ₹ -10.84 in Million

IRR= 9%

PI=
Year 2013 2014 2015 2016 2017 2018
Cash flows 12.8035 38.41 36.41 54.18 38.95 76.7355
Discount rate 11% 11% 11% 11% 11% 11%

Net of PV ₹ 169.16
Initial Investment 180

PI= ₹ 0.94

Payback period = 5 Years

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