Nike is planning to develop the new "MAX" sneakers. The firm claims this product will offer a great blend of fit and design. Nike plans to sell this new product over a $5-$year period and can manufacture the new product for $$50$ each in variable costs. Fixed costs for the operation are estimated at $5$ billion dollars per year. The planned unit price will be $$120.$ The necessary equipment can be purchased for $$10$ billion and

will be depreciated on a MACRS schedule $($depreciation table below$).$ You predict that the equipment can be sold at the end of the project for $$1$ billion.

Nike CEO John Donahoe has asked his team to carefully study whether Nike should go ahead and produce his new product. He understands the new product will define the brand's public perception, at least for the next decade. Because of this, Nike spent $$500$ million on a marketing study over the previous year. Nike has also already spent another $$2$ billion developing the new product. Nike currently sells other sneakers, and developing this new product will undoubtedly affect the sales of the current products. Nike had already planned to terminate the production of the old sneakers in $2026($year $2),$ meaning that production is planned to drop to $0$ starting in $2027($year $3).$ If Nike does not proceed with the project, sales of the old sneakers are expected to be at $200$ million units annually for $2025$ and The price of the existing product is $$100,$ with variable costs of $$40$ and fixed costs of $$900$ million per year. If Nike produces the new product, the price of the old product will need to be reduced to $$70,$ and sales of the old product will be reduced to $100$ million in year $1$ and to $50$ million units in year $2.$ Net working capital requirements for the products will be $20\%$ of sales and will occur with the timing of the cash flows for the year $2025($year $1).$ This means there is no initial outlay for NWC$,$ but changes in NWC will first occur in Year $1.$ The corporate tax rate is $21\%$

Question $1.$ Estimate the unit sales To estimate the sales volume $($units$)$ for the new product, you will perform a time series regression analysis

on the unit sales of previous years and use these results to forecast unit sales for the next $10$ years. You also need to comment on the regression and explain whether or not it gives us reliable results. Data is provided below.

Question $2.$ Obtain the project's cash flows. To obtain the cash flows, remember that you have to estimate the operating cash flows, the capital spending, and the changes in net working capital. For the operating cash flow, you must first obtain the pro forma financial statements. This includes first obtaining the appropriate depreciation for all relevant periods and then doing the complete analysis from revenues to net income. Be careful that this project affects the sales of the precious project. Remember to always use incremental cash flows and the stand$-$alone principle.

To obtain capital spending, be careful with the tax implications of selling the equipment.