- You have been hired as a capital budgeting analyst by a sporting good firm that manufactures athletic shoes
- And has captured 10% of the overall shoe market.
- The total market value is worth $100 million a year.
- The fixed costs associated with manufacturing these shoes is $2 million a year
- And variable costs are 40% of the revenues.
- The company’s tax rate is 40%.
- The firm believes that it can increase its market share to 20% by investing $10 million in a new distribution system
- which can be depreciated over the system’s life of 10 years to a salvage value of zero
- And spending $1 million a year on additional advertising.
- The company proposes to continue to maintain working capital at 10% of annual revenues.
- The discount rate used for this project is 8%.
a) What is the initial investment for this project?
b) What is the annual operating cash flow from this project?
c) What is the NPV of this project?