Kane Running Shoes is considering the manufacture of a special shoe for race walking, which will indicate if an athlete is running (that is, both legs are not touching the ground). The chief economist of the company presented the following calculation for the Smart Walking Shoe (SWS): • R&D: $200,000 annually in each of the next four years For the manufacturing project: • Expected life span: ten years Investment in machinery: $250,000 (at t = 4) expected life span of the machine ten years • Expected annual sales: 5.000 pairs of shoes at the expected price of $150 per pair . Fixed cost: $300,000 annually • Variable cost: $50 per pair of shoes Kane's discount rate is 12%, the corporate tax rate is 40%, and R&D expenses are tax deductible against other profits of the company. Assume that at the end of project that is, after fourteen years) the new technology will have been superseded by other technologies and therefore will have no value. (a) What is the NPV of the project?
Kane Running Shoes is considering the manufacture of a special shoe for race walking, which will indicate if an athlete is running (that is, both legs are not touching the ground). The chief economist of the company presented the following calculation for the Smart Walking Shoe (SWS):
• R&D: $200,000 annually in each of the next four years
For the manufacturing project:
• Expected life span: ten years
Investment in machinery: $250,000 (at t = 4) expected life span of the machine ten years
• Expected annual sales: 5.000 pairs of shoes at the expected price of $150 per pair
. Fixed cost: $300,000 annually
• Variable cost: $50 per pair of shoes
Kane's discount rate is 12%, the corporate tax rate is 40%, and R&D expenses are tax deductible against other profits of the company. Assume that at the end of project that is, after fourteen
years) the new technology will have been superseded by other technologies and therefore will
have no value.
(a) What is the
(b) The International Olympic Committee (TOC) decided to give Kane a loan without interest
for six years in order to encourage the company to take on the project. The loan will have
to be paid back in six equal annual payments. What is the minimum loan that the IOC should
give in order that the project will be profitable?
(Continuation of previous problem) After long negotiations, the IOC decided to lend Kane
$600.000 at t = 0. The project went ahead. After the research and development stage was completed (at t =4) but before the investment was made, the IOC decided to cancel race walking as
an Olympic event. As a result, Kane is expecting a large drop in sales of the SWS shoes. What is
the minimum number of shoes Kane has to sell annually for the project to be profitable in each
of the following two cases:
(a) If, in the event of cancellation, the original loan term continues?
(b) If, in the event of cancellation, the company has to return the outstanding debt to the IOC
immediately?
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