Alla Aeroshoes is planning to market and sell its new Bluetooth-enabled shoe in

Question

Alla Aeroshoes is planning to market and sell its new Bluetooth-enabled shoe in two markets: national and international. The local market will require an initial investment and will have cash inflows for three years. If things work out, they will invest in an expansion and sell internationally, expecting benefits for four years. Assume a MARR of 10% and a risk-free interest rate of 5 %. Consultants suggest that the volatility of the cash flows is between 35% and 50%.

Discuss their expansion strategy.

Year $

0 Invest $60 Million

1 $20 Million

2 $22 Million

3 $24 Million

4 Invest $160 Million

5 $60 million

6 $85 Million

7 $100 Million

8 $120 Million

Explanation / Answer

For Calculation NPV of cash flow

Cash Volatility

30%

Cash Volatility

50%

Based on NPV expansion stratergy is benefit to Alla Aeroshoes

but as per Consultants suggest that the volatility of the cash flows is between 35% and 50%

on 35% cash flow volatility (Single) Expension NPV in Positive 39.138Million

But on 50% Cash flow Volatility NPV became negative -0.2705Million

than On expansion is even on cash volatility of 50% Company Loss is 0.2705M which is profitable up to 39.138Million even at 35% Cash Flow volatility.

Year Cash Flow PV @ 5% Amount

Cash Volatility

30%

Cash Volatility

50%

0 -60 1 -60 1 20 0.9524 19.048 2 22 0.9070 19.954 3 24 0.8639 20.7336 4 -160 0.8227 -131.632 -131.632 -131.632 5 60 0.7835 47.01 30.5565 23.505 6 85 0.7462 63.427 41.2276 31.7135 7 100 0.7107 71.07 46.1955 35.535 8 120 0.6768 81.216 52.7904 40.608 Total = NPV 130.8266 39.138 -0.2705

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