Instructions: Complete the following mini$-$case. Submit a Word document that answers

the questions and an Excel spreadsheet that supports all your calculations. A template from

the class lecture $ma{y}_{?}$ be used.

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 $12\%.$

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.

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 $+-10\%,+-20\%,$ and $+-30\%$ above your initial estimates. Construct a table that shows

the sensitivity analysis. Comment on whether$/$how this affects the decision to

implement the project.

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.

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?

In addition to the previous risk analysis, are there any externalities NIIIKE Designs

should consider? ${?}^{**}$ No calculations are necessary. Consider only conceptual issues$*$