Reference no: EM132983230

Question - A sporting goods firm manufactures athletic shoes and has captured 10% of the overall shoe market, which is worth $ 100 million a year. The fixed costs associated with manufacturing the shoes is $ 2 million a year and variable costs are 40% of revenues. The firm's tax rate is 40%. This enterprise believes that it can increase its market share to 20% by investing $ 10 million in a new distribution system (which can be depreciated over its life of 10 years to a salvage value of zero) and spending $ 1 million a year in additional advertising. Working capital will be maintained at 10% of annual revenues, with working capital investments being made at the start of each year and working capital being salvaged at the end of year 10. The discount rate for this project is 8%.

1. What is the initial investment for this project?

2. Compute the annual operating cash flow from this project.

3. Determine the NPV of this project.

4. How much would the firm's market share have to increase in order to the firm be indifferent between accepting and rejecting the project?