Reference no: EM132621690

Sprint Bolt Ltd is a producer of specialized sports shoes. The company has been conducting research and development of a new model where the lower mould can automatically adjust itself to avoid foot injury. The model has been tested and the managing board is happy to launch its production if it is financially viable. The company has already spent $ 800,000 for research and development. the new model will have a 5 years life time, after that the company will stops its production. The new production facilities and equipment will costs $22,000,000 which will be depreciated on a straight line basis to zero book value. The company will not sell the equipment after the production of new products is finished.

The company expects to sells 80,000 pairs in the first year at $ 300 per pair. As the new technique can be potentially followed by competitors, every year the sale quantity is expected to decrease by 10% and the sell price will decrease by 8%. Variable costs are expected to be 40% of sales. While the new model generates a high gross profit rate, the company expects a high level of product return of 5% on sales.

As a financial manager of the company, you are conducting a capital budgeting analysis of the financial viability of the new model.

The company tax rate is 30%. Company's required pay back is 2 years and required rate of return is 25%. Assume that all cash flows are made at the end of each year.

Problem a. Calculate the incremental cash flow for each year including year 0 and year 5).

Problem b. Calculate the payback back period of the project.

Problem c. Calculate the net present value (NPV )that is, the net benefit or net loss in present value terms of the project.

Problem d. Calculate the present value index of the project.

Problem e. Calculate the discounted pay back period of the project.

Problem f. Calculate the internal rate of return of the project.

Problem g. Identify and explain what other factors Sprint sport should consider. Explain if the company should accept the project or not?