Cash Flow Estimation for Sneaker and Persistence Projects

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Project Value

Sneaker and Persistence are prospective projects that offer a lot to customers and investors. They benefit the customer as new products are released and the investors and owners when they make profits. The aim of this case analysis is to assess the two projects and provide a recommendation on which project is more attractive.

John Culter did a preliminary assessment of Persistence and his calculation of the net cash flow has some errors. John evaluated the Net Free Cash Flow (NFCF) for persistence instead of the net cash flow (NCF). Calculating the NFCF means that the results have inconsistencies; they do not represent the NCF for the project. NFCF is calculated from networking capital, EBIT less tax, and the capital expenditure. Depreciation is a fixed operating cost that should be included in the calculation of the net operating cost. John left it out while making calculations for the value of the business. Fixed assets should be included as an operating expense for the financial period of acquisition and when the assets are sold. Depreciation has no impact on cash flow for periods in between acquisition and disposal.

Revenue

Calculations of NCF include cash flow from operating, financing, and investing activities in the project. The NCF for Persistence includes cash inflows and cash outflows. I calculated the net cash flow of the project and the result was as summarized in Table 1.

Table 1: Summary of Cash flow for the Persistence project.

Year Inflow Outflow Net Flow
2012 $75,000,000.00 $88,000,000.00 -$13,000,000.00
2013 $52,500,000.00 $38,956,400.00 $13,543,600.00
2014 $72,450,000.00 $51,272,800.00 $21,177,200.00
2015 $94,690,072.00 $64,496,348.00 $30,193,724.00

The assumptions for the calculations are that the inflow for 2012 (Year 0) is from revenues. The inflow from the years that follow is drawn from New Balances share of Revenue for the year. The outflows in all of them are from operating expenses and tax expenditure. The value of fixed assets is included in the outflows for Year 0 and the inflows for the last period. The value is modified for the last and first financial periods for the period.

NPR and IRR: Persistence

Quantitatively, the Persistence project is slightly attractive because it is a short-term venture. It would have been more attractive the project was long and revenues were sustainable at that time. I estimated the net present value (NPV) of the Persistence project as -$18,811,033.08. The periods for the estimation were 4 and the discount rate 14%. The Internal Rate of Return (IRR) is 0.987%; the same variables used in calculating the NPV for the project were used in estimating the IRR.

NPR and IRR: Sneaker

I estimated the net present value for Sneaker project as $167,939,976.34 and the internal rate of return as -2.747%. The discount rate used to estimate the NPR for Sneaker was 11%.

Recommendation

I recommend Persistence to Rodrigues because of the financials it posts and the fact that it is a new product with unexplored potential. It is worth noting that both projects, Persistence and Sneaker, are not attractive. They may be money pits for Rodrigues based on their quantitative elements. Even so, qualitative aspects may better the products and significantly improve their value. Based on the NPR and IRR, Persistence is a more attractive option than Sneaker. This is a quantitively less attractive project even with 7 periods. The discount rate for Sneaker is however lower, 11%, than that of Persistence, 14%.

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