Managers at UAA are considering entering rollerblades market that they expect to be strong over the next five years. To enter market successfully Reebok will need to build a manufacturing facility, spend money on rollerblade design, marketing etc.
Is the project worth undertaking? The estimates are as follows. The cost of building a new manufacturing facility is $300 million its salvage value after 5 years is only $1 million. The initial (year 1) sales are estimated at 5,000,000 pairs. The inflation rate, real cost of capital and tax rate are assumed to be constant over time. Assume that Sales Revenue per unit, Variable cost and Cash Fixed cost grow over time at the rate of inflation.

Under Armor project
	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Key Assumptions
Sales Growth Rate			20.0%
Change in Sales Growth Rate from previous period				25.0%	-50.0%	-30.0%
Inflation Rate		3.1%
Real Cost of Capital		8.0%
Tax Rate		40.0%
Discounting
Discount Rate = Cost of Capital
Cumulative Discount Factor
Price or Cost / Unit
Unit Sales
Sales Revenue / Unit		$34.99
Variable Cost / Unit		$20.50
Cash Fixed Costs		$20,000,000
Cash Flow Forecasts
Sales Revenue
Variable Costs
Gross Margin
Cash Fixed Costs
Depreciation
Total Fixed Costs
Operating Profit
Taxes
Net Profit
Add Back Depreciation
Operating Cash Flow (OCF)
Investment in Plant & Equip
Cash Flows
Present Value of Each Cash Flow
Net Present Value
				Sales Growth rate (year 2)
			10%	15%	20%	25%
		5,000,000
	Unit Sales	7,000,000
	(year 1)	9,000,000
		11,000,000