Case Study Outline

for Capital
Budgeting: Sneakers
2013 (Harvard
Business Review
Case)
Objective:

• The objective of this case study is to provide students with hands-on experience
in analyzing a capital budgeting decision using cash flow analysis, risk
assessment, and valuation techniques. By working in groups, students will apply
financial management concepts, such as net present value (NPV), internal rate of
return (IRR), payback period, and sensitivity analysis, to evaluate whether a
proposed project should be accepted or rejected.
Case Overview (Sneakers 2013)

• Scenario: A footwear company, Sneakers Inc., is considering a capital

investment to launch a new product line. The decision involves evaluating the
project’s projected cash flows, investment costs, and profitability under various
scenarios
• .Focus Areas: Cash flow estimation, opportunity cost of capital, risk assessment,
and recommendations.
• Students are required to analyze the financial data provided in the case and
make a final recommendation on whether the company should move forward
with the investment.
 Initial Investment and Cash Flow
Projections
• Initial Investment Outlay (Year 0): $180 million (Factory,
equipment, working capital)
• Annual Cash Flows (2013-2018):
• Calculation of net operating cash flows.
• Treatment of cannibalization, variable costs, and depreciation.

• Terminal Cash Flow (2018): Liquidation of assets and tax impact.

Questions
• Should the following be included in Sneaker 2013's cash flow projection?
• Factory construction and equipment purchase?
• Research and development costs?
• Cannibalization of other sales?
• Interest costs?
• Changes in current assets/liabilities?
• Taxes?
• Cost of goods sold (COGS)?
• Advertising expenses?
• Depreciation charges?
Deliverables:

1.Group Report and Presentation:

Each group submits a comprehensive report detailing cash flows, sensitivity analysis, and
scenario analysis (common tasks) and presents findings from their unique focus area.

2.Required Sections of the Report:

Section 1: Cash flow projections and NPV analysis.
Section 2: Sensitivity analysis (identify and discuss the most critical variable).
Section 3: Scenario analysis (best case, base case, worst case).
Section 4 (Unique Area Focus): Group-specific problem analysis, recommendations,
and strategic considerations.
 Guidelines and Expectations
• Key Components of the Analysis:

1. Initial Investment Calculation:

1. Identify the initial outlay, including equipment costs, working capital needs, and any other
initial expenditures.
2. Cash Flow Estimation:
1. Break down cash inflows and outflows over the project’s life.
2. Include operating revenues, expenses, taxes, and working capital changes.
3. Discuss any assumptions made (e.g., sales growth rate, cost escalation, etc.).

3. NPV Calculation:
1. Compute the project’s NPV using the provided or assumed discount rate.
2. Show detailed cash flow projections and NPV calculations.
 Guidelines and Expectations
• Key Components of the Analysis:

4. IRR and Payback Period:

1. Calculate the IRR to evaluate the project’s rate of return.
2. Determine the payback period and discuss its relevance for the decision.

5. Sensitivity Analysis:
3. Analyze how changes in key variables (e.g., sales, discount rate, cost estimates) affect the
project’s NPV and IRR.
4. Create multiple scenarios (e.g., base case, optimistic case, and pessimistic case).

6. Risk Assessment:
5. Identify and discuss the main risks associated with the project.
6. Propose mitigation strategies or contingency plans.

7. Final Recommendation:
7. Provide a clear recommendation (accept/reject) based on the analysis.
8. Justify the decision by referring to key metrics (NPV, IRR, payback period) and qualitative
 Guidelines and Expectations

• Common Tasks for All Groups (Foundational Work)

• Require each group to construct:

• Initial Cash Flow Projections: Operating cash flows, depreciation, and terminal value.
• Net Present Value (NPV) Calculation: Using their cash flow estimates.
• Sensitivity Analysis: Testing key variables like sales growth, discount rate, and operating
costs.
• Scenario Analysis: Base case, best case, and worst-case NPV scenarios.
 Guidelines and Expectations
Group-Specific Focus Areas:

Unique Focus or Problem Suggested Problem

Group
Area Statement
Should the company expand to
a new region or remain focused
Group 1 New Market Expansion
on its existing market?
Evaluate market entry risks.
Should the company invest in
Product Line Expansion or
Group 2 expanding its product line or
Diversification
focus on existing products?
Evaluate the financial viability
Sustainability or Green of integrating sustainability
Group 3
Initiatives initiatives into the project (e.g.,
eco-friendly sourcing).
 Guidelines and Expectations
Group-Specific Focus Areas:

Unique Focus or Problem Suggested Problem

Group
Area Statement
Should the project be funded
Capital Structure and with equity, debt, or a mix?
Group 4
Financing Options Evaluate the impact of
financing on project NPV.
How should the company
respond if a competitor
Competitive Response
Group 5 introduces a similar product?
Strategy
Evaluate the risk and pricing
impacts.
Should the company delay or
Delaying or Phasing the phase the investment to
Group 6
Investment mitigate risks? Evaluate the
cost-benefit of this strategy.
Structure of the Written Report:
1.Title Page: Group name, project title, and date.

2.Executive Summary: 1-page summary of the recommendation and key

findings.
3.Introduction: Brief overview of the project and its strategic importance to
Sneakers Inc.
4.Capital Budgeting Analysis: Detailed breakdown of NPV, IRR, payback period,
and sensitivity analysis.
5.Assumptions and Key Inputs: Explanation of all major assumptions used in
the analysis.
6.Risk Assessment: Discussion of risks and proposed mitigations.
Presentation Guidelines:

• Time Limit: 15-20 minutes, followed by a 5-minute Q&A session.

• Format: PowerPoint:

• Introduction and project overview (1-2 slides)

• Cash flow projections and key assumptions (3-4 slides)

• NPV, IRR, and payback period results (2-3 slides)

• Sensitivity analysis and risk assessment (2-3 slides)

• Final recommendation (1 slide)

Grading Criteria
Category Weight (%) Description
Quality and accuracy of cash
Cash Flow and NPV Analysis 25% flow projections and NPV
calculation.

Depth of analysis, clear

Sensitivity and Scenario
25% identification of key variables,
Analysis
and interpretation of results.

Effectiveness of addressing the

group-specific problem and
Unique Area Focus Analysis 20%
providing actionable
recommendations.

Clarity, engagement, and use of

Presentation and Delivery 15% visual aids during the
presentation.

Evidence of equal contribution

Collaboration and Teamwork 15% and teamwork during report
development and presentation.