Business and Management
Submitted By luckygenius
ChampSport is a company which focus on the sporting goods, particularly in the various racket sport arenas. A new idea of replacing metal baseball bats by the use of the alloy was under considering. After I calculated the beta, NPV, and NPV sensitive analysis, I high recommend that we should accept this project.
For the Beta calculation, I collect the industry data and average them to get the average asset data, which I think is more reasonable to explain the level of the risk for the ChampSport INC. Then I conduct the equity beta for ChampSport is 1.01. Finally, I got the 7.43% as the result of the WACC. (See Comparable Firm sheet)
After that, I do the NPV analysis. When calculating the Operating Cash Flow, I decide to omit the expense of the research and development cost since it is the sunk cost and will not affect the future project and profit. I also assume that the annual increase rate for price of the product is 2% and annual growth rate of sales is 10%. By doing that, I generate the operating cash flow and finally get the NPV $11,227,508 and IRR 18.54%. Based on our assumption, the NPV shows that really bright future and profit ability for this project.
Finally, I also did the NPV sensitive analysis to see how much the effect of WACC, annual growth rate of price and sales to the NPV. We can see that with the growth of the WACC to 12%, the NPV decreases to $5,355,268 and still keeps high positive. For the table of the NPV sensitive, we could find that annual growth rate of price ranges from 0% to 2% and growth rate of sales ranges from 5% to 20%, the NPV is still keep positive. And under the worst scenario assumption, the NPV is $5,838,024. (Price 0% and sales 5%, see Project Pro Forma sheet)
Therefore, based on our analysis, the project for replacing the metal baseball bats with the alloy is really good project, and…...