I need this question answered by midnight tonight (May 4th).
Stacy's Apparel
Stacy's Apparel is a clothing supplier to boutique clothing shops in
the eastern US. The firm's products are often leaders in clothing
trends in the US, and their managers always look for new products to
offer. The president of Stacy's, Christine Kuhl, was intrigued by a
proposal made by one of Stacy's suppliers. The supplier's
representative showed her a sample of "cloth" which looked and felt
like fine grained alligator or leather, but was really plastic. The
rep said that their company had developed a new process for
transferring patterns to plastic goods, and that the process gave
almost 100% fidelity down to very fine dimensions.
Christine Kuhl was impressed with the product, and asked her staff for
their comments. The new products manager replied with great
enthusiasm that she had been thinking of proposing a new purse that
exuded quality but that would be sufficiently low in price that it
would appeal to many consumers rather than those willing to pay
boutique prices. This material (which could be used in different
patterns for the inside and outside of the purse) would be perfect for
that purpose. The president asked the manufacturer's rep for more
information, and assigned a small team to brainstorm and to return
with detailed financial projections.
Products in the apparel business have very short life cycles, although
this one was expected to have a two-year life because of the
innovativeness of the product and the cost for entering the market
(the molds needed to produce the new material would cost $90,000).
The marketing manager, in conjunction with the controller, decided
there were three possible market reactions to the new purse: great
acceptance, good acceptance, and weak acceptance. Further, they
concluded that there was a reasonable chance that a competitor with a
similar product would enter the market in the second year of the
project. However, entry by a competitor would be contingent on the
market's reaction to the product (especially given the relatively high
cost of entering the market). After a few days of research and
thought, the team decided that the following best described their
assessment of the market and potential competitive reactions to the
new purse:
Great Acceptance: 10% probability
If great acceptance, 70% chance of a competitor in year 2
If great acceptance, 30% chance of NO competitor in year 2
Good Acceptance: 60% probability
If good acceptance, 40% chance of a competitor in year 2
If good acceptance, 60% chance of NO competitor in year 2
Weak Acceptance: 30% probability
If weak acceptance, 20% chance of a competitor in year 2
If weak acceptance, 80% chance of NO competitor in year 2
The below table contains the company's estimates of key variables:
Wholesale price per unit 10.00
Variable Costs 40%
Annual Fixed Costs 15,000
Cost of molds 90,000
NWC as % of sales 5%
Tax rate 40%
Project Hurdle Rate 15%
Depreciation for tax and accounting purposes will be straight-line (to
zero) over five years, but assume that the molds will be sold back to
the manufacturer for about $20,000 at the end of the project (year
two). Initial net working capital of $5,000 will be needed in year 0,
and during the life of the project will be 5% of sales, but will drop
to 0 shortly after conclusion of the project (so it can be assumed
that NWC is 0 at the end of year 2). In addition, forecast initial
sales and sales growth rates for different scenarios are:
Year 2 Unit Sales Growth
Acceptance Year 1 Unit Sales No Competition Yes Competition
Great 15,000 25% 15%
Good 12,000 10% 5%
Weak 5,000 0% -5%
For example, if product acceptance is "good" and no competition
emerges, unit sales in year 1 and 2 will be 12,000 and 13,200 (i.e.
10% growth). If competition does emerge, year 2 unit sales will be
12,600 (i.e. 5% growth).
Required Steps
1. Create a spreadsheet called "Outcomes".
2. Fill in the "Scenario" and "Probability" columns in the table in
the workbook "Outcomes". List each possible outcome, and the
probability of occurrence of each. You will fill in the other columns
later.
3. Use the spreadsheet "Template" to estimate the income statement and
other items contained in the spreadsheet for years 0, 1, and 2,
assuming the product acceptance is "great" and that no competition
emerges. You may add more detail if you wish, but do not use less. Use
these items to estimate free cash flow, and the NPV, IRR and MIRR of
this scenario. Use the hurdle rate for the finance and reinvestment
rates in the MIRR function. Note: you should end up with an NPV of
$28,974 for the "Great Acceptance / No Competition" scenario. Do not
proceed until you match this result. I will test your spreadsheet by
using my own numbers for initial unit sales in years 1 and 2, and
verifying that it computes the correct NPV, IRR, and MIRR.
4. Estimate the NPV, IRR, and MIRR for each scenario, and record your
results in the spreadsheet "Outcomes". You can do this two ways: (i)
create a different spreadsheet for each scenario, or (ii) use the same
spreadsheet, and change the assumptions repeatedly.
5. Calculate the expected NPV, expected IRR and expected MIRR, on the
spreadsheet "Outcomes". State whether or not the company should
undertake the project, and justify your recommendation. |
