AL$-$Jawhara Company is a large Palestinian footwear manufacturer, based in Hebron, Palestine, specializing in men's and children's shoes of various sizes. AL$-$Jawhara manufactures a variety of shoes and sandals. AL$-$Jawhara has a lengthy history in the shoe industry. AL$-$Jawhara is constantly investing its vast experience in the development of its goods and has grown by utilizing the highest levels of current technology in the design and production of the most up$-$to$-$date shoe styles. AL$-$Jawhara has been exporting for many years to America, Europe, and a few other Arab countries, as the firm mostly uses imported raw materials of the highest quality.

AL$-$Jawhara is getting ready to release its own running shoes $($Steps$),$ which will have unique cushioning to help with shock absorption and avoid injuries from repetitive motion. This new model was designed to be a mid$-$tech, high$-$quality running shoe that could be sold for under $$150.$

AL$-$Jawhara's sales and marketing, technology engineers, manufacturing, and finance staff were all involved. Abu Al$-$Zooz, the Chief managerial and financial accountant, had to come up with credible analysis and a recommendation regarding whether or not to proceed based on the structured and detailed facts. His boss and the AL$-$Jawhara CEO were both excited about the idea of Steps.

Steps

The business team had prepared the following baseline information on Steps project:

$1.$ Steps project was supposed to last six years. Assume the analysis was completed by the end of $2021.$

$2.$ The shoe's suggested retail price was $$140.$ At the retail level, gross margins for high$-$end sports footwear ranged around $40\%,$ meaning each pair sold netted AL$-$Jawhara $$84.$

$3.$ AL$-$Jawhara marketing division predicted the following sales figures for Steps based on market research and consideration of other previous athlete endorsements:

Year $(2022)(2023)(2024)(2025)(2026)(2027)$

Pairs sold $(360,000)(480,000)(660,000)(600,000)(540,000)(270,000)$

$4..$ The launch of Steps would reduce sales of existing AL$-$Jawhara shoes in the first two years as follows:

Lost sales: $2022$: $$7$ million $2023$: $$3$ million

Assume the lost revenue had the same margins as AL$-$Jawhara.

$5.$ The company needed d to establish a facility in Amman in order to produce the shoe. This necessitated an initial investment of $$40$ million, which would be depreciated on a $20-$year straight$-$line basis. The building, according to the firm's analysts, will be sold for $$19\mathrm{.}4$ million after the project is completed. When calculating yearly depreciation costs, this "salvage value" was not taken into account.

$6.$ The firm must acquire $$4\mathrm{.}2$ million in equipment quickly. The equipment would cost $$0\mathrm{.}6$ million in freight and installation. Equipment and freight$/$installation costs were intended to be depreciated on a $6-$year straight$-$line basis. After the project was completed, it was estimated that the equipment could be sold for $$0\mathrm{.}9$ million.

$7.$ Two of the company's working capital accounts were expected to expand promptly in order to manufacture Steps. To fill the supply chain, $$3\mathrm{.}8$ million in inventory would be needed soon, and accounts payable would rise by $$1\mathrm{.}2$ million. By $2023,$ accounts receivable would account for $8\%$ of project revenue, inventories would account for $25\%$ of the project's variable costs, and accounts payable would account for $20\%$ of the project's variable costs. By the end of the sixth year, the project's working capital would be fully recovered.

$8.$ Variable costs were forecasted to account for $55\%$ of revenue.

$9.$ Selling, general, and administrative expenses were expected to be $$1\mathrm{.}5$ million per year.

$10.$ The following expenditures for other advertising and promotion were estimated:

Year $(2022)(2023)(2024)(2025)(2026)(2027)$

A&P Expense $($millions$)($$$4\mathrm{.}5)($$$4\mathrm{.}5)($$$4)($$$3\mathrm{.}5)($$$2\mathrm{.}5)($$$1\mathrm{.}5)$

$11.$ Steps has already cost AL$-$Jawhara $$0\mathrm{.}5$ million in research and development.

$12.$ AL$-$Jawhara project intended to be funded using a mix of equity and debt. The debt's interest charges were estimated to be around $$0\mathrm{.}3$ million per year. The AL$-$Jawhara discount rate for new projects like this was $12\%$

$13..$AL$-$Jawhara$$s effective tax rate was $15\%.$

Assignment Questions

$1.$ Should the following be included in Mumtaz$$s capital budgeting cash flow projection? Why or why not?

a$.$ Building a factory and purchase$/$installation of the equipment

b$.$ Research and development costs

c$.$ Cannibalization of other shoe sales

d$.$ Interest costs

e$.$ Changes in current asset$/$current liabilities accounts

f$.$ Taxes

g$.$ Cost of goods sold

h$.$ Advertising and promotion expenses

i$.$ Depreciation charges

$2.$ Produce projected capital budgeting cash flow statements for Steps project for the six years $(2022-2027).$ Does Steps appear viable from a quantitative standpoint? To answer this question, estimate the project$$s payback, discounted payback period, net present value, and internal rate of return.