The case study Sneaker 2013 introduces the basics of capital budgeting. It allows the computation of a project’s initial investment outlay, the project’s annual net operating cash flows, and the project’s terminal net cash flow. This case study likewise discusses the valuation of both the Sneaker 2013 and the Persistence project. To determine which project is likely to be profitable and accept that project, it is important to calculate and consider some financial determinants such as WACC, NPV, IRR, and payback period. It also looks into other factors affecting New Balance's decision whether to invest in the Sneaker 2013 running shoe or the Persistence hiking shoe by delving into an in-depth analysis of both projects’ cash flows and financial metrics and looking into a few nonfinancial factors relevant to the project.
Richard Bliss and Mark Potter
Harvard Business Review (BAB166-PDF-ENG)
March 01, 2015
Case questions answered:
Case study questions answered in the first and second solutions:
- Produce a projected capital budgeting cash flow statement for the Persistence project by answering the following:
(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? - Which project do you think is riskier? How do you think you should incorporate differences in risk into your analysis?
- 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?
- Should Rodriguez be more or less critical of cash flow forecasts for Persistence than of cash flow forecasts for Sneaker 2013? Why?
- What is your final recommendation for Rodriguez?
Case study questions answered in the third solution:
- 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:
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?
d.) 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. - Which project do you think is riskier? How do you think you should incorporate differences in risk into your analysis?
- 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?
- Should Rodriguez be more or less critical of cash flow forecasts for Persistence than of cash flow forecasts for Sneaker 2013? Why?
- What is your final recommendation for Rodriguez?
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Sneaker 2013 Case Answers
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New Balance, a shoe manufacturing company, is located in Brighton, United States. The company is well known globally due to the high quality and wide variety of shoes provided to customers. The company saw an opportunity in the 12-18-year-old male segment of the market while other competitors had ignored it.
Due to the lack of resources or star power, the company can’t compete in this segment. However, the company saw an opportunity to target younger customers if effective marketing and advertising were used. Thus, Sneaker 2013 was initiated in response to this opportunity.
Although the target of this project was between 12 and 18 years old, the market trend was expected to be 27 years and older as the population ages. So, the company began to review another hiking shoe proposal called Persistence. Even though the company had not yet entered this market, this market was considered one of the fastest-growing in the footwear industry.
This report provides an analysis and valuation of both the Sneaker 2013 and the Persistence project. To determine which project is likely to be profitable and accept that project, it is important to calculate and consider some financial determinants such as WACC, NPV, IRR, and payback period.
Moreover, this report consists of the project sensitivity analysis of some financial determinants, the comparison between both projects and some recommendations for the company in order to decide which project is better.
Finally, with careful and thorough consideration, the company is recommended to go ahead with the Sneaker 2013 project and use Kirani James as their newest athlete endorser.
Introduction
In consideration of market share to compare with the competitors of New Balance, the major competitors are as follows:
source: The Statistics Portal, Share of the athletic footwear market
High-quality athlete shoes are purchased at a reasonable price by baby boomers, who are the primary target market of sneakers.
The company demands to renovate the products created with new ideas and designs that will stimulate sales and profitability. The market share would be larger in this competitive industry.
Presenting 2 projects, Sneaker 2013 and Persistence in the athletic footwear industry, the first project (Sneaker 2013), with a 6-year venture life from 2013 to 2018, contains customary cash flow.
This cash flow also includes uncertainty(risk) of endorsing the market product for promotion. With the small size of investment in a competitive market, the second project evaluates a new hiking shoe venture.
Sneaker 2013
Capital Budget Projection.
The capital budgeting of Sneaker 2013 depends on new equipment installation to make progress. The initial cost for investment is usually integrated into the Net Present Value (NPV) calculation and is mostly in a negative value. The valuation is to determine whether to…
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