Question: Kane Running Shoes is considering the manufacturing of a special shoe for race walking which will indicate if an athlete is running (i.e. both legs are not touching the ground). The chief economist of the company presented the following calculation for the Smart Walking Shoes (SWS):
• R&D $200,000 annually in each of the next 4 years. The Manufacturing project: Expected life span: 10 years
• Investment in machinery: $250,000 (at t=4) expected life span of the machine 10 years
• Expected annual sales: 5,000 pairs of shoes at the expected price of $150 per pair
• Fixed cost $300,000 annually
• Variable cost: $50 per pair of shoes Kane's discount rate is 12%, the corporate rate is 40%, and R&D expenses are tax deductible against other profits of the company. Assume that at the end of project (that is. after 14 years) the new technology will have been superseded by other technologies and therefore have no value.
a) What is the NPV of the project?
b) The International Olympic Committee (IOC) decided to give Kane a loan without interest for 6 years in order to encourage the company to take on the project. The loan will have to be paid back in 6 equal annual payments. What is the minimum loan that the IOC should give in order that the project will be profitable?