Reference no: EM132993240

After extensive research and development, ASICS a running shoe company, has recently developed a new super shoe, the ASICS Meta Edge. ASICS must now decide whether to make the necessary investment to produce and market the new shoe. The research and development costs so far have totalled about $1 million. This shoe range would be put on the market at the beginning of next year and ASICS expects it to stay on the market for a total of four years with minor upgrades after 2 years. Marketing costing $250 000 last year showed that there is a significant market for this super shoe. As the financial analyst at ASICS, you are asked to evaluate this new project and provide a recommendation on whether to go ahead with the investment using the NPV method. ASICS must initially invest $12 million in production equipment to make this super shoe. The equipment is expected to have a ten-year useful life. The equipment should also be depreciated using the straight-line method. This equipment can be sold for $6 million at the end of four years. Sales and Price figures for the shoe are forecasted in the table below. The varying price reflects the varying discount to customers.

Price per shoe
Year 1: $320
Year 2: $300
Year 3: $250
Year 4: $200

Number of shoes expected to be sold
Year 1: 20000
Year 2: 15000
Year 3: 17500
Year 4: 20000

Problem 1: Variable costs including cost of production and administration fee will account for 25% of the price. In addition, the project will incur $200 000 in marketing costs in the first year, $200 000 in the second year, $50 000 in the third year and none in the fourth year. Assume a tax rate is 30% on all profit/losses and all cash flows will occur at year-end and a 10% discount rate. The project will initially require an increase in net working capital of $5 million that will be recovered at the end of the project.