Typical projects for NIIIKE Designs typically have a coefficient of variation ranging between 0.95 to 1.25. A 2-percentage point risk premium is added to the WACC if the initial CV exceeds 1, and the WACC is reduced by 0.5 percentage points if the CV is 0.5 or less. What should be the WACC for this project? What is the revised value for the base-case NPV that was initially estimated?
tructions: Complete the following mini-case. Submit a Word document that answers questions and an Excel spreadsheet that supports all your calculations. A template from class lecture maybe used. Fashion House, NIIIKE Designs recently hired you as an assistant to the CFO. Your first task is evaluating whether NIIIKE should expand by developing a new basketball shoe line using college basketball stars. Your research reflects the following information: - You expect the proposed project to span the next five years. - Current estimates indicate sales will be 200,000 units in year one, with 15% sales growth over the following 2 years and 7% growth in the final 2 years. - The unit price in Year 1 is $75. Given estimated demand and inflationary pressure, prices are expected to rise by 5% each subsequent year. - The project requires purchasing new equipment worth $50 million after installation. The new equipment is state-of-the-art, so you expect to be able to sell it for $1 million when the project ends. - As a result of the project, current assets would increase by $750,000, and payables would increase by $450,000. - The new equipment falls into the MACRS 7-year class, so the applicable rates are 14.29%,24.49%,17.49%,12.49%,8.93%,8.92%,8.93%, and 4.46% in each successive year. - Variable costs are estimated to be 25% of the unit price for each year. They will be added along with the number of units sold. No economies of scale. - Fixed costs, excluding depreciation, are estimated at $2,500,000 per year - The state-plus-federal tax rate is 25%, - WACC is 12%. Intial Investment 50,000,000 Salvage 6,538,750 NOWC 1,200,000 1,200,000 CF from Project 51,200,0008,348,75011,374,53112,613,60013,507,94022,508,668 NPV 4,343,378.29 31 IRR 9% 32 MIRR Payback Period 4.40 PI 0.92 tructions: Complete the following mini-case. Submit a Word document that answers questions and an Excel spreadsheet that supports all your calculations. A template from class lecture maybe used. Fashion House, NIIIKE Designs recently hired you as an assistant to the CFO. Your first task is evaluating whether NIIIKE should expand by developing a new basketball shoe line using college basketball stars. Your research reflects the following information: - You expect the proposed project to span the next five years. - Current estimates indicate sales will be 200,000 units in year one, with 15% sales growth over the following 2 years and 7% growth in the final 2 years. - The unit price in Year 1 is $75. Given estimated demand and inflationary pressure, prices are expected to rise by 5% each subsequent year. - The project requires purchasing new equipment worth $50 million after installation. The new equipment is state-of-the-art, so you expect to be able to sell it for $1 million when the project ends. - As a result of the project, current assets would increase by $750,000, and payables would increase by $450,000. - The new equipment falls into the MACRS 7-year class, so the applicable rates are 14.29%,24.49%,17.49%,12.49%,8.93%,8.92%,8.93%, and 4.46% in each successive year. - Variable costs are estimated to be 25% of the unit price for each year. They will be added along with the number of units sold. No economies of scale. - Fixed costs, excluding depreciation, are estimated at $2,500,000 per year - The state-plus-federal tax rate is 25%, - WACC is 12%. Intial Investment 50,000,000 Salvage 6,538,750 NOWC 1,200,000 1,200,000 CF from Project 51,200,0008,348,75011,374,53112,613,60013,507,94022,508,668 NPV 4,343,378.29 31 IRR 9% 32 MIRR Payback Period 4.40 PI 0.92
