Knyttan Upscale Appeal

You will take the role of manager of technology acquisition at upscale knitwear seller Jon Smedley. The firm is interested in using Knyttan technology as a platform for the production of bespoke goods in leisure lines, and as a means of appealing to more trendy, up-market consumers (Kansara, 2015). Production of bespoke goods is commissioned by the buyer. Knitwear seller Jon Smedleys intention is to form a partnership with Unmade (Unmade, n.d.), which developed Knyttan technology for its own use. Alongside Knyttan, Unmade developed a customization engine that serves as an easily embeddable product that can be integrated into any website, allowing a user (an employee internal to the firm, an intermediate buyer or an external customer) to turn a digital product into on-the-spot knitwear in minutes. Jon Smedley intends to use Knyttan, controlled by this customization engine available to consumers, to widen its sales substantially beyond its mainly traditionalist customer base using this technology. The firm sees significant possibilities for peer-to-peer trendsetting, as users form their own unique designs. We also see the possibility of celebrity-led designs. We believe that these features will be especially fruitful in the upscale market. The cost of the Knyttan unit ($197,445) will be paid off in seven equal installments, in which case interest is charged only on the remaining debt, per year. Taxes for Jon Smedley average 34%. Depreciation is straight line to zero, and net working capital is initially $20,000, but falls to 5% of sales (patient services) thereafter. You estimate that interest may rise to vary from 8% to 18%, prior to the point when financing will be conducted. The firm demands that new projects are discounted at a rate of 28%. Resulting tabulations at an 8% rate of interest are seen below, in Tables 1 and 2. Table 3 summarizes results at 8% and 18% rate of interest.

Managers in a variety of design and technical divisions are concerned that a project of this magnitude will strain resources available to other projects. As manager of technology acquisition, you have been invited to share a summary of major issues involved in a decision to adopt new technology of this nature, at a financial level, with key management peers. You understand that this may be challenging because your audience is non-financial, and so you plan to outline central financial issues involved in this decision to adopt a Knyttan, in partnership with Unmade. Jon Smedleys chief executive officer has agreed to this approach, and has instructed you, as manager of technology acquisition at Jon Smedley, to determine whether the project will be acceptable should interest rates increase as expected, and financing for the Knyttan device will consist of debt, on which the firm will be charged a market rate of interest. Assume that you have prepared the summaries of financial data included below, using an interest rate of 8%.

QUESTIONS:

1. At interest rates of 8% and 18%, analyze project finances using Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Criteria as these may be used to determine the acceptability of the proposed project, under the assumption that the project is standalone and will not draw resources from other areas of the firm. Include analysis of all components of project cash flow.

2. Recalling that (EBIT + Depreciation - Interest - Taxes) = Operating Cash Flow, evaluate the role of net working capital, depreciation and taxation in determining project cash flows.