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In this question you are only asked for the answer in Part D . Nevertheless, you should answer the previous parts to get to the
In this question you are only asked for the answer in Part D Nevertheless, you should answer the previous parts to get to the answer in Part D Do not round intermediat
calculations.
Ro Hondo Inc. is a leading manufacturer of casualwear with expected sales of $ million in the next year. With more and more people obtaining gym memberships, Ro Hc
Inc. management sees potential in the market for sportswear. Internal studies suggest that the sportswear market as a whole will have sales of $ in the next year. Due to
strong brand, Ro Hondo should be able to capture of this market. For simplicity, assume that it can capture this market share in the first year it launches a line of
sportswear. However, it is estimated that of Ro Hondo's sales of casualwear, such as Tshirts, are already being used by customers for sportswear. If Ro Hondo introduc
line of sportswear, half of these customers would switch from their casualwear line to sportswear. The expected growth rate for sales of casualwear and sales of sportswear
per year indefinitely.
Ro Hondo Inc. has spent $ million on R&D for its casualwear and could leverage this and develop the new line of sportswear for an additional $ million in R&D Ro Honc
would also need to expand its production plant and warehouse facility at a cost of $ Both the R&D spending and the investment into the plant and warehouse facilit
would occur right away. The new facility would be fully depreciated in the first year of its existence. No additional spending on CAPX or R&D is expected in the future. Comb
cost of goods sold and SG&A expenses are expected to be of sportswear sales. Net working capital needed for the new sportswear line would be of sales in year a
would subsequently grow proportionally with sales. The cost structure and the net working capital requirements of casualwear as a percentage of sales are exactly the sam
for sportswear. Ro Hondo Inc. finances all its investments with equity, its tax rate is and the WACC for both the sportswear and casualwear divisions is
Part A Assume Ro Hondo Inc. decides to introduce the new line of sportswear. What are the incremental free cash flows FCF from this project right away, ie at the start
the project
Part B What are the incremental free cash flows FCF from the new line of sportswear in the first year of the project?
Part C What are the incremental free cash flows FCF from the new line of sportswear in the second year of the project?
Part D What is the net present value NPV of the expansion into sportswear?
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