Fashion House, NIIIKE Designs recently hired you as an assistant to the CFO. Your first task is evaluating whether NIIIKE should expand by developing a new basketball shoe line using college basketball stars. Your research reflects the following information:

$$ You expect the proposed project to span the next five years.

$$ Current estimates indicate sales will be $200,000$ units in year one, with $15\%$ sales growth over the following $2$ years and $7\%$ growth in the final $2$ years.

$$ The unit price in Year $1$ is $$75.$ Given estimated demand and inflationary pressure, prices are expected to rise by $5\%$ each subsequent year.

$$ The project requires purchasing new equipment worth $$45\mathrm{.}5$ million after installation. The new equipment is state$-$of$-$the$-$art, so you expect to be able to sell it for $$5$ million when the project ends.

$$ As a result of the project, current assets would increase by $$750,000,$ and payables would increase by $$450,000.$

$$ The new equipment falls into the MACRS $7-$year class, so the applicable rates are $14\mathrm{.}29\%,24\mathrm{.}49\%,17\mathrm{.}49\%,12\mathrm{.}49\%,8\mathrm{.}93\%,8\mathrm{.}92\%,8\mathrm{.}93\%,$ and $4\mathrm{.}46\%$ in each successive year.

$$ Variable costs are estimated to be $25\%$ of the unit price for each year. They will be added along with the number of units sold. No economies of scale.

$$ Fixed costs, excluding depreciation, are estimated at $$2,500,000$ per year

$$ The state$-$plus$-$federal tax rate is $25\%,$

$$ WACC is $12\%.1.1.$Calculate this project's initial cash flow, operating cash flows, and terminal cash flow.

$2.$ Calculate and interpret this project's payback period, net present value,return, modified internal rate of return, and profitability index. Should the project be accepted according to each number? Suppose the acceptable payback period is $3$ years.

$3.$ Suppose you are not very confident in your estimates for unit sales. To gauge the impact of a wrong estimate, you analyze the sensitivity of NPV to different sales projections. Specifically, you calculate how NPV changes if your initial sales estimates are $\backslash$pm $10\%,\backslash$pm $20\%,$ and $\backslash$pm $30\%$ above your initial estimates. Construct a table that shows the sensitivity analysis. Comment on whether$/$how this affects the decision to implement the project.

Scenario Probability Unit Sales Unit Prices $(\%)$ Variable cost $(\%)$

Best case $25\%18\%$ sales growth for the first $3$ years, $10\%$ thereafter $$85$ initially,

then $8\%$ price increase per year $20\%$ of the

unit price

Base case $50\%$ Same as the

initial forecast Same as the

initial forecast Same as the

initial forecast

Worst Case $25\%8\%$ sales growth for the first $2$ years, and $-2\%$ thereafter $$72,6\%$ growth $28\%$ of the

unit price$4.$ In addition to the sales forecast, you would like to test the project$$s outcomes under various conditions. Suppose you want to examine the following scenarios: Construct a table that shows NPV under the various scenarios, the expected NPV$,$ the standard deviation of NPV$,$ and the coefficient of variation. Comment on whether$/$how this affects the decision to implement the project.

$5.$ Typical projects for NIIIKE Designs typically have a coefficient of variation ranging between $1$ to $2\mathrm{.}25.$ A $2-$percentage point risk premium is added to the WACC if the initial CV exceeds $2,$ and the WACC is reduced by $0\mathrm{.}5$ percentage points if the CV is $\mathrm{.}7$ or less. What should be the WACC for this project? What is the revised value for the base$-$case NPV that was initially estimated?

$6.$ In addition to the previous risk analysis, are there any externalities NIIIKE Designs should consider? $*$No calculations are necessary. Consider only conceptual issues$*$