On January $20,2024,$ Rhodri Harries, Senior Vice President of Gildan Activewear, was preparing

for a meeting with the management committee scheduled the next week. On his desk was a

capital budgeting and investment proposal $$ a new product line of branded shirts that the

committee was considering for launch. As the head of the finance department, Rhodri was

required to work along with his team on a detailed capital budgeting analysis and present the

findings to the management committee for their approval. As per standard company practice,

each capital budgeting and investment project was evaluated using the traditional Net Present

Value $($NPV$)$ approach and the Internal Rate of Return $($IRR$)$ criterion for determining whether

the company would undertake the project or not.

Rhodri had a lot to think about as he considered the analysis of the capital budgeting project.

What would be the basis for calculating the after$-$tax operating cash flows for the capital

project? How would he arrive at the CCA and working capital requirements for computing the

NPV$?$ What would be the basis for calculating the terminal year cash flows? With all these

questions in mind, Rhodri decided to focus on the proposed capital budgeting project for the

next few days.

North American Business to Consumer Retail Market

The North American textile market is stable. No significant growth or decline is expected in the

marketplace

Company Background

Gildan Activewear Inc. is a Canadian manufacturer of branded clothing, including undecorated

blank activewear such as t$-$shirts, sport shirts and fleeces, which are subsequently decorated by

screen printing companies with designs and logos$.$ The company also supplies branded and

private label athletic, casual, and dress socks to retail companies in the United States. The

company has approximately $44,000$ employees worldwide and owns and operates

manufacturing facilities in Rio Nance, Honduras and the Caribbean.

Project Investment Proposal Details

The project is estimated to be of $10$ years duration. It involves setting up new machinery with

an estimated cost of as much as $$8$ million CAD, including installation. This amount could be

depreciated using the straight$-$line method $($SLM$)$ over a period of $10$ years with a resale value

of $$245,000.$ The project would require an initial working capital of $$325,000$ with cumulative

investment in net working capital to be maintained at $10\%$ of each year$$s projected revenue.

With the planned new capacity, the company would be able to produce $240,000$ pieces of shirts

each year for the next $10$ years. In terms of pricing, each shirt can initially be sold at $$18$ CAD

apiece, which takes into account the target segment and competitor pricing. The project

proposal incorporates an annual increase of $3\%$ in the price of the shirt to compensate for

inflationary impact. With regards to the raw material costs and other expenses, the project

estimated the following details:

$$ Raw material cost for manufacturing shirts at $$6\mathrm{.}15$ CAD per shirt, slated to rise by $5\%$

per annum on account of inflation.

$$ Other direct manufacturing costs at $$1\mathrm{.}92$ CAD per shirt with an annual increase of $3\%$

per annum on account of inflation.

$$ Selling, general, and administrative expenses $($including employee expenses$)$ at

$$575,000$ per annum, expected to increase by $7\%$ each year.

$$ The equipment would qualify as class $8$ for CCA purposes

$$ Tax rate was assumed to be $25\%.$

Funding

For funding of the expansion project, the promoters agreed to infuse $50\%$ in the form of equity

with the rest $(50\%)$ being financed from issue of new debt. Based on the current credit position

and market scenario, new debt can be raised by the company at $12\%$ per annum. Cost of equity

was assumed to be $15\%$ by Rhodri. The requisite discounting rate or weighted average cost of

capital $($WACC$)$ for NPV and IRR calculations can now be calculated with the help of the above

assumptions.

Demand Scenario

Although the project proposal estimates maximum annual production of $240,000$ shirts, Rhodri

decided to do capital budgeting analysis under two demand scenarios: Optimistic and Expected.

Expected production is $20\%$ less than optimistic.

Rhodri has delegated the detailed financial calculations on this project to you. He has asked

you to prepare your quantitative analysis in a manner that is easy to review and could be taken

directly to the management committee if the project moves forward. He also wants your

advice on the sensitivity of any of the assumptions. Where is the project particularly sensitive

to assumptions, that if wrong, could change the decision to move forward or not move forward

with the project. Please format your analysis to him in a memo not exceeding $4$ pages double

spaced $($appendices are outside of this page count$).$