To reduce business risk and diversify its operations, Nike is considering an expansion into the

fashion apparel business, producing high-priced casual clothing for teenagers and young adults.

It has been estimated that it will cost Nike $ 3.0 billion to establish a presence in this

business. Of the initial investment of $3 billion, $2.50 billion will be used to purchase

land, building, equipment and machineries; and .5 billion is the net working capital

requirement at the inception of the project. The initial investment is subject to straight line

depreciation over a 10-year period.

A major market-testing organization was employed to do a market study. Their initial

study, which has already been completed and expensed, cost $ 200 million and has

provided with a sense of the magnitude of this market, and Nike's potential in the market.

The total market for casual apparel is estimated to be $ 100 billion currently, growing at

5% a year. Nike is expected to gain a 2% market share in the first year that it enters the

market, and to increase its market share by 1% a year until the tenth year. Beyond that

point, Nike's revenues are expected to grow at the same rate as the overall market.

Variable cost of production is 40% of sales revenue. Nike will allocate 5% of its existing

general and administrative (fixed) costs to the new division for the accounting purposes.

These costs now total $1 billion for the entire firm irrespective of whether Nike enters the

apparel business. In addition, it is expected that Nike will have an increase of $20 million

in general and administrative costs when the new division starts generating revenues, and

that this amount will grow with the new division's revenues after that.

Nike spent $1 billion in advertising expenses in the most recent year. If the casual apparel

division is added to the company, total advertising expenses are expected to be 7% higher

than they would have been without the apparel division each year to year 10.

The apparel division will create a continuous working capital needs, which have been estimated as follows:

o The sale of apparel on credit to wholesalers and large retailers will create accounts receivable amounting to 5% of revenues each year.

o Inventory (of both raw material and finished goods) will be approximately 3% of revenues.

o The credit offered by suppliers will be 5% of revenue.

All of these working capital investments will have to be made at the beginning of each year in which goods are sold.

Nike has an effective corporate tax rate of 40%. The required rate of return on the projects is 10% per annum.

Calculate the NPV for the project.

Calculate IRR for the project.