The business case for the hiking shoe needed some work; but after preliminary analysis, she focused on the following inf

[answerhappygod]

The business case for the hiking shoe needed some work; butafter preliminary analysis, she focused on the followinginformation:
1. The life of the Persistence project would be only threeyears, given the steep technological learning curve for this newproduct line.
2. The wholesale price of Persistence (net to New Balance) wouldbe $90.00.
3. The hiking segment of the athletic shoe market was projectedto reach $350 million during 2013, and it was growing at a rate of15% per year. New Balance’s market share projections forPersistence were: 2013, 15%; 2014, 18%; and 2015, 20%.
4. The firm would be able to use an idle section of one of itsfactories to produce the hiking shoe. A cost accountant estimatedthat, according to the square footage in the factory, thissection’s overhead allocation would amount to $1.8 million peryear. The firm would still incur these costs if the product werenot undertaken. In addition, this section would remain idle for thelife of the project if the Persistence project were notundertaken.
5. The firm must purchase manufacturing equipment costing $8million. The equipment fell into the five-year MACRS depreciationcategory. Depreciation percentages for the first three yearsrespectively were: 20%, 32%, and 19%. The cash outlay would be atTime 0, and depreciation would start in 2013. Analysts estimatedthe equipment could be sold for book value at the end of theproject’s life.
6. Inventory and accounts receivable would increase by $25million at Time 0 and would be recovered at the end of the project(2015). The accounts payable balance was projected to increase by$10 million at Time 0 and would also be recovered at the end of theproject.
7. Because the firm had not yet entered the hiking shoe market,introduction of this product was not expected to impact sales ofthe firm’s other shoe lines.
8. Variable costs of producing the shoe were expected to be 38%of the shoe's sales.
9. General and administrative expenses for Persistence would be12% of revenue in 2013. This would drop to 10% in 2014 and 8% in2015.
10. The product would not have a celebrity endorser. Advertisingand promotion costs would initially be $3 million in 2013, then $2million in both 2014 and 2015.
11. The company's federal plus state marginal tax rate was40%.
12. In order to begin immediate production of Persistence, thedesign technology and the manufacturing specifications for a newhiking shoe would be purchased from an outside source for $50million. This outlay was to take place immediately and be expensedimmediately for tax purposes.
13. Annual interest costs on the debt for this project would be$600,000. In addition, Rodriguez estimated the cost of capital forthe hiking shoe would be 14%.
For the second part of the Sneaker 2013, we will shift our focusto the analysis of the Persistence hiking boot. In this week’sassignment:
1. Start by projecting EBIT for Persistence like you did lastweek for Sneaker 2013. Note that methodology for projecting revenueand expenses is not exactly the same as for last week. Follow thecase data to make your estimates for EBIT.
2. Project cash flows for Persistence including a. Initial (year0) outlays b. Convert your EBIT forecast into operating cash flowfor years 1-3 c. The terminal cash flow for year 3
3. Calculate NPV, IRR and the payback period forPersistence.
4. Based on those answers and looking at the same answers fromlast week for Sneaker 2013, which project looks most attractive forNew Balance?