Nike Inc. has developed a new sneaker called NuCore that will make athletes run faster for longer, jump higher and look terrific. It will require them to invest: $ 3,800,000 of new capital expenditures now. This Capital Expenditure will be depreciated, straight line, over 7 years. As a result of this investment their Revenues in the first year will be: $ 5,300,000 In the second year the revenues grow at 8% and will stay constant until year 5. Right at the end of the fifth year they will stop production and will sell the Property, plant and Equipment for 20% of the original purchase price. They will also license NuCore to another manufacturer for an EV/EBITDA multiple of 2.0x of year 5 EBITDA. This one-time license fee is to be received in year 5 and assume it is net of taxes. Additionally, they will need: $ 340,000 of net working capital now. In years 1 through 4 the increase in net working capital balance will be 1% of Revenues. They will fully recover all they have invested in Net Working Capital by the end of year 5. Other information: Their Cost of Goods Sold is 65% of sales and their SG&A (including depreciation) is 12% of Revenues. They face a total tax rate of 35%. Finally, their WACC is 12%. What is the NPV and IRR of this proposition. Should they do this project? What is their EBIT Breakeven quantity in year 1 if their contribution margin is $12.00 and SG&A, as you have calculated, is considered a fixed expense? ANSWERS: NPV: $ CAPEX$ $REV$ $NWC$ DO NOT DELETE THESE CELLS $ 3,800,000 $ 5,300,000 $ 340,000 IRR: $ 1,230,323.64 21% Yes, because NPV >O Should they do Project: Breakeven Quantity: Nike Inc. has developed a new sneaker called NuCore that will make athletes run faster for longer, jump higher and look terrific. It will require them to invest: $ 3,800,000 of new capital expenditures now. This Capital Expenditure will be depreciated, straight line, over 7 years. As a result of this investment their Revenues in the first year will be: $ 5,300,000 In the second year the revenues grow at 8% and will stay constant until year 5. Right at the end of the fifth year they will stop production and will sell the Property, plant and Equipment for 20% of the original purchase price. They will also license NuCore to another manufacturer for an EV/EBITDA multiple of 2.0x of year 5 EBITDA. This one-time license fee is to be received in year 5 and assume it is net of taxes. Additionally, they will need: $ 340,000 of net working capital now. In years 1 through 4 the increase in net working capital balance will be 1% of Revenues. They will fully recover all they have invested in Net Working Capital by the end of year 5. Other information: Their Cost of Goods Sold is 65% of sales and their SG&A (including depreciation) is 12% of Revenues. They face a total tax rate of 35%. Finally, their WACC is 12%. What is the NPV and IRR of this proposition. Should they do this project? What is their EBIT Breakeven quantity in year 1 if their contribution margin is $12.00 and SG&A, as you have calculated, is considered a fixed expense? ANSWERS: NPV: $ CAPEX$ $REV$ $NWC$ DO NOT DELETE THESE CELLS $ 3,800,000 $ 5,300,000 $ 340,000 IRR: $ 1,230,323.64 21% Yes, because NPV >O Should they do Project: Breakeven Quantity