Sneaker 2013 Harvard Case Solution & Analysis

Sneaker 2013 Case Solution

Introduction:

In 2013, the major competitors of New Balance were Nike with 60% of market share, Asics with 12%, Reebok with 3% of market share, and Puma with 10.4% of market share compared with New Balance’s market share of 5.8%. The target market of sneakers are baby boomers, who are willing to purchase at a reasonable price for high quality athlete shoes.

The company wants to refresh its products by incorporating new ideas and features in to the company’s product that will increase the company’s sales and profitability,which would lead to increase the market share in this high paced competitiveindustry.

This case presents two particular capital planning practices in the athletic footwear industry. The main activity is around a running tennis shoe with an initial capital investment and a 6-year venture life, along with this, it contains customary cash flows with risk of endorsing the product in market for promotions. The second projection evaluates a new hiking shoe venture with small amount of investment in a highly grown competitive market.

Capital Budgeting Projection:

The Sneaker 2013, capital budgeting depends on the installation of new equipment for making progress in the company. It includes the initial cost of investment, which is always integrated in the calculation of net present value. Initial cost is always in negative value and it helps in determining the worth of project and in whether to accept it or not and thisresults in net present value after deducting the present value of future cash flows.

The New Balance initial coast for sneakers 2013 and Persistence is$ -56 million and $ -23 million respectively. Basically the actual equipment invested at time zero is $ 150 million for Sneakers and $ 23 million for persistence. The initial cost is changed, as it is adjusted by adding additional investment of following, such as:

  • Sale and purchase of building
  • Selling and general expense
  • Research and development
  • Change in Accounts payable and inventory

Identification of each cash flows:

1.      EBIT:

The EBIT is used in order to consider the projected inflows, as it shows the net income after paying cost and all other expenses such as promotion cost and depreciation etc. Research and development is considered as sunk cost; therefore, it is irrelevant for NPV calculation.

2.      Interest cost:

The interest cost arises due to debt outstanding and it is used in calculating the cost of capital, which is used in discounting. Hence, it is not used in NV calculation.

3.      Changes in Accounts receivables, and accounts payable

Accounts receivables reflect the assets and accounts payable used as liabilities of company and shows an important effect on decision making processes and they are widely used in NPV calculations.

4.      Taxes:

The taxes show the relevant use in net present value because it is used as the cash flow, as an outflow for the investment or earning.

5.      Variable cost:

Variable cost is used as it is considered the cost of goods sold.Along with this, it is relevant in NPV calculation because it is used in decision making..................

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