Sneaker 2013_Solution.docx - Case Sneaker 2013 Estimating cashflows for investment decisions Case Background This Sneaker-2013 case study is about the

Sneaker 2013_Solution.docx - Case Sneaker 2013 Estimating...

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Case: Sneaker 2013: Estimating cashflows for investment decisions Case Background This Sneaker-2013 case study is about the sports shoe company i.e. New Balance. The company’s product development VP had asked his team to come up with the most profitable project between two new projects in which the New Balance company would invest its capital. The two projects were (1) sneaker-2013 which was a most promising new athletic shoe and (2) persistence, a new hiking shoe. Because of lack of resources and star power, New Balance never dominated the 18 to 24 years old age male market. However, the company’s CEO Jim Davis had seen an opportunity in the 12 to 18 years old male market segment in the name of Kirani James who recently won a gold medal for 400-meter dash. So, the product development team was asked to design a shoe named as sneaker-2013 targeting to the young consumer market. In other hand, New Balance was trying to enter a new market in which they had not entered yet, i.e. hiking and active walking sector. As the team analysed that this market was the fastest growing areas of the footwear industry. The new hiking shoes named persistence was meant to target the market of 25 to 40 years old age male and female segment. Hence, out of these two projects, the head of the product development team, Michelle Rodriguez, was asked to analyse thoroughly and do all the calculation regarding the cash flows and then come up to the senior management with the best project in which the company would invest its capital. The Sneaker 2013 study involves the estimation of cash flow for investment decisions and choose best decisions. Cash flow estimation is an essential part of the capital budgeting p rocess. Cash flow estimation is a necessary step for assessing investment decisions of any kind of business. Project cash flows consider all kinds of inflows of cash. The estimation of cash flows is done through the calculation of all cash inflows and then subtracting the cash outflows from it. The steps are forecasting operational costs, forecasting revenues, collect data and set norms for better estimation. Forecasting cash flows is one of the major challenges faced by valuation professionals. Cash flow estimation is based on the principles of consistency principle states that consistency must be maintained between the flow of cash in a project and the rates of discount that are applicable on the cash flows. The separation principle suggests that project cash flows can be segregated into investment and financing flows. The post-tax principle suggests that the forecast of cash flows should be based on after-tax method. The incremental cash flow principle suggests that only cash flows relevant to the valuation of a project are the incremental cash flows resulting from it.
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