Case Notes/Answers
SNEAKER 2013 by Richard Bliss Mark Potter
Discussion Questions:
Sneaker 2013: Assignment Questions
1. Should the following be included in Sneaker 2013’s capital budgeting cash flow
projection? Why or why not?
a. Building a factory and purchase/installation of the equipment
b. Research and development costs
c. Cannibalization of other sneaker sales
d. Interest costs
e. Changes in current asset/current liabilities accounts
f. Taxes
g. Cost of goods sold
h. Advertising and promotion expenses
i. Depreciation charges
2. Produce a projected capital budgeting cash flow statement for the Sneaker 2013
project by
answering the following:
a. What is the project’s initial (year 0) investment outlay?
b. What are the project’s annual (years 2013-2018) net operating cash flows?
c. What is the project’s terminal (2018) non-operating net cash flow?
d. Does Sneaker 2013 appear viable from a quantitative standpoint? To answer this
question, estimate the project’s payback, net present value, and internal rate of
return.
Persistence: Assignment Questions
1. Which cash flows should be incorporated into the project’s forecast? Why or why not?
2. Produce a projected capital budgeting cash flow statement for the Persistence project
by answering the following:
a. What is the project’s initial (year 0) investment outlay?
b. What are the project’s annual net operating cash flows?
c. What is the project’s terminal (2018) net cash flow?
3. Does Persistence appear attractive from a quantitative standpoint? To answer this
question, estimate the project’s payback, net present value, and internal rate of return.
Additional Assignment Questions
1. Which project do you think is more risky? How do you think you should incorporate
differences in risk into your analysis?
2. Based on the calculated payback period, net present value (NPV), and internal rate of
return (IRR) for each project, which project looks better for New Balance shareholders?
Why?
3. Should Rodriguez be more or less critical of cash flow forecasts for Persistence than of
cash flow forecasts for Sneaker 2013? Why?
4. What is your final recommendation to Rodriguez?
, BAB167
NOVEMBER 2014
Sneaker 2013
Teaching Note
Case Summary
This case provides a comprehensive introduction to the basics of capital budgeting. It presents
students with two distinct capital budgeting exercises revolving around the athletic footwear
industry. The first exercise is about a running sneaker with a large capital outlay and a six-year
project life. It contains many traditional project cash flows as well as a significant endorsement
risk. The second exercise involves evaluating a hiking shoe project with a smaller initial
investment in a more rapidly growing but unfamiliar market segment.
The authors have used this case with audiences including sophomore undergraduates, MBAs,
and seasoned executives. In the first two audiences, students build spreadsheet solutions from
the assumptions provided; for executives, we often give them the completed analysis and focus
more on interpretation of financial metrics and on qualitative discussion. We have also used one
or both of the exercises as exam questions.
Teaching and Learning Objectives
The case was developed with the following objectives:
Introduce the basic concepts of capital budgeting, including cash flow calculation and
decision metrics.
Determine the cash flows appropriate to consider for a potential project.
Forecast a project’s cash flows.
1
, BAB167
NOVEMBER 2014
Sneaker 2013
Evaluate a project using payback period, net present value (NPV), and internal rate of
return (IRR).
Raise the issue of how to compare projects with unequal lives.
Introduce different types of risk inherent in capital budgeting and how they are
incorporated into the analysis.
Providing two exercises gives students the opportunity to practice basic capital budgeting
techniques and instructors the flexibility to design a class around one or both projects.
Keywords: capital budgeting, business case, finance, project analysis, decision criteria, value
creation.
Teaching Plan
The case is flexible enough for use with a variety of audiences and time constraints. We start by
providing the menu of assignment questions and then go into some detail about how they might
be used most effectively depending on the audience and the time available.
Sneaker 2013: Assignment Questions
1. Should the following be included in Sneaker 2013’s capital budgeting cash flow projection?
Why or why not?
a. Building a factory and purchase/installation of the equipment
b. Research and development costs
c. Cannibalization of other sneaker sales
d. Interest costs
e. Changes in current asset/current liabilities accounts
f. Taxes
g. Cost of goods sold
h. Advertising and promotion expenses
i. Depreciation charges
2. Produce a projected capital budgeting cash flow statement for the Sneaker 2013 project by
answering the following:
a. What is the project’s initial (year 0) investment outlay?
b. What are the project’s annual (years 2013-2018) net operating cash flows?
c. What is the project’s terminal (2018) non-operating net cash flow?
d. Does Sneaker 2013 appear viable from a quantitative standpoint? To answer this
question, estimate the project’s payback, net present value, and internal rate of
return.
2
SNEAKER 2013 by Richard Bliss Mark Potter
Discussion Questions:
Sneaker 2013: Assignment Questions
1. Should the following be included in Sneaker 2013’s capital budgeting cash flow
projection? Why or why not?
a. Building a factory and purchase/installation of the equipment
b. Research and development costs
c. Cannibalization of other sneaker sales
d. Interest costs
e. Changes in current asset/current liabilities accounts
f. Taxes
g. Cost of goods sold
h. Advertising and promotion expenses
i. Depreciation charges
2. Produce a projected capital budgeting cash flow statement for the Sneaker 2013
project by
answering the following:
a. What is the project’s initial (year 0) investment outlay?
b. What are the project’s annual (years 2013-2018) net operating cash flows?
c. What is the project’s terminal (2018) non-operating net cash flow?
d. Does Sneaker 2013 appear viable from a quantitative standpoint? To answer this
question, estimate the project’s payback, net present value, and internal rate of
return.
Persistence: Assignment Questions
1. Which cash flows should be incorporated into the project’s forecast? Why or why not?
2. Produce a projected capital budgeting cash flow statement for the Persistence project
by answering the following:
a. What is the project’s initial (year 0) investment outlay?
b. What are the project’s annual net operating cash flows?
c. What is the project’s terminal (2018) net cash flow?
3. Does Persistence appear attractive from a quantitative standpoint? To answer this
question, estimate the project’s payback, net present value, and internal rate of return.
Additional Assignment Questions
1. Which project do you think is more risky? How do you think you should incorporate
differences in risk into your analysis?
2. Based on the calculated payback period, net present value (NPV), and internal rate of
return (IRR) for each project, which project looks better for New Balance shareholders?
Why?
3. Should Rodriguez be more or less critical of cash flow forecasts for Persistence than of
cash flow forecasts for Sneaker 2013? Why?
4. What is your final recommendation to Rodriguez?
, BAB167
NOVEMBER 2014
Sneaker 2013
Teaching Note
Case Summary
This case provides a comprehensive introduction to the basics of capital budgeting. It presents
students with two distinct capital budgeting exercises revolving around the athletic footwear
industry. The first exercise is about a running sneaker with a large capital outlay and a six-year
project life. It contains many traditional project cash flows as well as a significant endorsement
risk. The second exercise involves evaluating a hiking shoe project with a smaller initial
investment in a more rapidly growing but unfamiliar market segment.
The authors have used this case with audiences including sophomore undergraduates, MBAs,
and seasoned executives. In the first two audiences, students build spreadsheet solutions from
the assumptions provided; for executives, we often give them the completed analysis and focus
more on interpretation of financial metrics and on qualitative discussion. We have also used one
or both of the exercises as exam questions.
Teaching and Learning Objectives
The case was developed with the following objectives:
Introduce the basic concepts of capital budgeting, including cash flow calculation and
decision metrics.
Determine the cash flows appropriate to consider for a potential project.
Forecast a project’s cash flows.
1
, BAB167
NOVEMBER 2014
Sneaker 2013
Evaluate a project using payback period, net present value (NPV), and internal rate of
return (IRR).
Raise the issue of how to compare projects with unequal lives.
Introduce different types of risk inherent in capital budgeting and how they are
incorporated into the analysis.
Providing two exercises gives students the opportunity to practice basic capital budgeting
techniques and instructors the flexibility to design a class around one or both projects.
Keywords: capital budgeting, business case, finance, project analysis, decision criteria, value
creation.
Teaching Plan
The case is flexible enough for use with a variety of audiences and time constraints. We start by
providing the menu of assignment questions and then go into some detail about how they might
be used most effectively depending on the audience and the time available.
Sneaker 2013: Assignment Questions
1. Should the following be included in Sneaker 2013’s capital budgeting cash flow projection?
Why or why not?
a. Building a factory and purchase/installation of the equipment
b. Research and development costs
c. Cannibalization of other sneaker sales
d. Interest costs
e. Changes in current asset/current liabilities accounts
f. Taxes
g. Cost of goods sold
h. Advertising and promotion expenses
i. Depreciation charges
2. Produce a projected capital budgeting cash flow statement for the Sneaker 2013 project by
answering the following:
a. What is the project’s initial (year 0) investment outlay?
b. What are the project’s annual (years 2013-2018) net operating cash flows?
c. What is the project’s terminal (2018) non-operating net cash flow?
d. Does Sneaker 2013 appear viable from a quantitative standpoint? To answer this
question, estimate the project’s payback, net present value, and internal rate of
return.
2
