Footwear industry analysis

Published: 2018-03-09 12:49:33
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Carnegie Mellon University
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Shoes industry analysis

Throughout the 2013 financial year, there were major competitors in the fashion industry just like other sectors. The anticipated market of the sneakers included boomers that were willing to buy the products at very reasonable prices particularly for the high-quality athletic shoes. The company focused on a fresh product through the incorporation of new ideas and traits in the products manifested by the company that would raise its sales and overall profitability that would result in increased market share in the high-paced industry that portrays the high level of competition. The head of New Balance Company, Michelle Rodriguez had intensified focus on reinstating the position of the company through implementation of a policy based on work-life balance. The company recounts on the opportunity for supplies of 12-18 years male segment that her competitors largely ignored.

Shoe industry statistics

The building of a factor and subsequent installation of equipment is a predetermined process in the initial cost of the company's investment during the capital budgeting process. Nevertheless, the cost of factory building should not be incorporated into NPV computation. Instead, only the initial capital costs of the equipment must always be integrated since it assists in the determination of whether to concede to the proposed factory building or the deduction from active present values features associated with the future cash flows. 

The research and development are irrelevant to the company's capital budgeting encompassing sunken costs. Subsequently, they should not be included as they are not considered during calculation of the Net Present Value. In essence, only the future cash flows should be considered in determining NPV.

The Cannibalization of other sneaker sales should be included. The decline in the sneaker's footwear market segment is the extra cash flow for the company. As a result, it leads to profitability and therefore justifies cannibalization as a mechanism of the company's future cash flow and an essential component of the NPV computation for Sneakers for inclusion.

The interest costs should not be included. Each interest expense evolves on loan capital and is considered during the calculation of the capital cost employed in the discount on investments. Subsequently, interest charges are useless during the calculation of NPV.

The Changes in current assets or the current liabilities account should be included. In essence, these variables are incremental in the computation of NPV hence leveraging the decision-making processes of the company. It is crucial to include a change in current assets therefore in the capital budgeting cash-flow projections of the enterprise.

Taxes should also be included since it is considered the cash flow incorporated into the schedule hence very relevant to the computation of NPV.

The cost of goods sold should be included. These costs are related to all variable project costs that are appraised in the decision-making process hence, an important variable in NPV calculations.

The advertisement and promotion expenditures are imperative. They should be incorporated while calculating NPV since it is directed connected to the project cost and influence the project profitability. Besides, it is also a future cash flow in the appraisal of the project.

The depreciation charges should not be included. Primarily, the reduction does not represent a cash item that is relevant to the capital budgeting process. Subsequently, it is irrelevant to the NPV calculation process.

Shoe Finance: The Projected Capital Budgeting

The first capital outlay represents the amount payable at the start of the investment. This scenario presents a negative value due to its significant capital investment that has been made by the company towards generating future positive cash flow returns.

The annual operating cash flows for the six years, between 2013 and 2018 appear as shown below:

 

‘000’

‘000’

‘000’

‘000’

‘000’

‘000’

Net Profits

$20, 000

$35,600

$67,790.39

$60, 081

$70,040

$30,920

 

 

 

 

 

 

 

The projects by the New Balance as at 2018 is $105,000,000 projected from its current financial position and precipitated by investments undertaken thereon.

The payback period is essential in determining the time taken in recouping investments made by the project that is important in screening the project. This process, however, appreciates the essence of the timing of the cash inflow past the payback period. It just focuses on early recovery.

The company's payback is, therefore, creates an important mechanism of investment appraisal. The NPV represents the difference in the total cash inflow and the cash outflow from the project. The net cash flow is discounted by rates of cost of capitals. This technique for the company also incorporates the relevant cash flows in future making it a very viable aspect in the investment portfolio of the enterprise. The company's Investment Rate of Returns presents the discount rate at which the net cash flow PV outflows are equal. This aspect is also determined as discount rate where the net cash flow PV associated with the project is zero. Pursuant of these variables, the Sneaker's project is viable based on the computations of IRR, payback method, and NPV.

Shoe Market Share: Persistence

 

The persistence variable costs, market share, general and administration costs including advertisements and promotions costs must be included in the final cash flow since they are all relevant cash flows that are directly linked to the project feasibility. The initial plan outlay stands at around $8,000.

 Secondly, the project annual cash flow appears as follows:

 

‘000’

‘000’

‘000’

‘000’

 

-

2013

2014

2015

Net Revenue

$8,000

$375

$1,767

$2,999

The terminal value of the project is $7,402.

From this review, the project involving the new hiking venture of shoes with small quantities of investment in a very competitive and highly grown market is riskier as it presents a significant challenge to both establishment and sustainability of the company's business portfolio.

The project dispensed by the company is viable for IRR and NPV calculations in which case as for payback solutions, the data is largely insufficient.

Finally, the decision rule in the calculation of NPV involves acceptance of the projects that provides high or positive NPV about other projects. Besides, NPV also ended in a persisting project that further triggers negative NPV. The New Balance should, therefore, undertake their project since it results in a positive NPV which makes it feasible.

sheldon

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