Case $2$ Crocs X Tesla

PART $1$:

Crocs is currently all about the collaborations and the collabs run the

gamut: Hello Kitty, McDonalds, Post Malone and Shrek. Crocs wants

you to help assess their newest collab idea $$ Crocs X Tesla, with a series

of Crocs inspired by Tesla cars.

Crocs spent $$50$ thousand on a market research project that resulted in

Tesla being a top suggestion for the next collab. The project will officially

begin $($t$=0)$ in January $2024($pretend that is today$).$ At the end of $2029$

$($t$=6),$ Crocs expects this collab with Tesla to end and make way for a new

collab. The tooling and equipment required for producing Crocs X Tesla

will cost $$1\mathrm{.}6$ million. The tooling and equipment is classified as a seven$-$year

asset and will be depreciated using Modified ACRS depreciation; no bonus depreciation will be used. The estimated market value of the tooling and equipment

at the end of the project is $$350$ thousand. Crocs already spent $$450$ thousand in machinery upgrades.

In the first year, they expect to sell $80$ thousand Tesla Crocs. For the next $3-$years the number of Crocs sold will

increase by $20\%.$ The last two years, they expect a decline in sales of $15\%$ a year. They believe they can sell the

Tesla Crocs for $$75$ a pair. Variable costs for Crocs production is $$12$ per pair. Fixed costs are estimated to be

$$4\mathrm{.}520$ million a year.

Net working capital for the project will be $6\%$ of sales and will occur with the timing of the cash flows for the year.

There is no initial outlay for NWC; changes in NWC will first occur at t$=1$ with the first year$$s sales.

Croc$$s tax rate is $24\%$ and they have a required return of $11\%.$

When the Tesla Crocs are launched, they expect sales of Nascar Crocs to be negatively impacted. For the first three

years of the project, Nascar Crocs will probably sell $32,000$ units less than planned because of the launch of the

Tesla Crocs. Bummer! Nascar Crocs sell for $$65$ a pair, and the variable costs for the Nascar Crocs are $$8$ dollars

a pair. There are no fixed costs, investments in NWC$,$ or capital expenditures that need to be accounted for when

it comes to the Nasdaq Crocs.

Crocs uses the tax shield approach for their project analysis, so you will too!

For Part $1$ you need to do the initial capital budgeting analysis. Construct the project$$s timeline and include the

relevant cash flows. Make sure to show Tesla the following information:

a$)$ the project$$s projected revenues

b$)$ the operating cash flows for the project $($tax shield approach$)$

c$)$ the net working capital cash flows $($make a NWC table$)$

d$)$ the after$-$tax salvage calculation

e$)$ the total project cash flows

f$)$ the investment criteria calculations

i$.$ the payback period of the project

ii$.$ the profitability index of the project

iii. the IRR of the project

iv$.$ the NPV of the project

Answer the following question: Based on your answer for f$,$ would you suggest Crocs enter a collab with Tesla?