Question 2

DutyBoot was a well-established company producing rugged hiking boots. The Board decided to extend the range by launching a 'fashion' hiking boot aimed at female urban dwellers. The rationale was the fast-growing market for 'fashion' sports clothing. A consultant was engaged to carry out the launch and the following tasks were undertaken.

• Predictions of cash flow based on estimated costs and predictions of market growth and market share
• Comparison of the risk weighted internal rate of return with the company hurdle rate

After three years the 'fashion boot' was not even close to the financial target and was abandoned. The CEO called a meeting to analyse what had gone wrong and the general feeling was that the failure must have been due to the fickle nature of the fashion market because the consultant had done everything right.

A recently appointed Board member then spoke up and said that while the consultant had done things right the financial analysis on which the project was based was only part of the story and in fact DutyBoot itself had been completely wrong.

Required:

What did this Board member mean? (20 Marks)