Financial Viability of Recycle Shoes With Nike Assessment Answer
Answer
Introduction
The assessment of the financial viability of the recycle shoes with the Nike brand has been done in the report. An estimation of the cash flows, Break even and the investment needs have been assessed for the three years to analyze if the venture is fruitful or not.
Financial viability assessment
The financial viability can be described as the ability to generate enough income in order to meet the operating expenses, debt obligations and other liabilities (Mcdermott and Awuzie 2016). The assessment of financial viability is extremely important to a business as taking a financially viable decision can help in the determination as to whether the business is successful or a failure. A business can be regarded as financially viable if it has a strong balance sheet, generates good amount of cash flows and has a profitable state thereby providing good amount of ROI to its equity holders.
The Attainment of the financial successes determined which is based on the previous records and projections for the future (Trimble et al. 2016). With the help of past data, the plan of the future can be determined and there can be a better control on the financial performance of the company.
For conducting financial assessment, it is required to estimate revenue and expense, determine the contribution if the strategy can provide positive result.
Considering the financial state of the company the company has recorded a good amount of profit in the last 3 financial years for 2017 to 2019. It is further require to analyze the investment needs of the company in order to have a venture with the recycle shoes and then assessing the net cash flows that will be generated by the company if the investment is undertaken. The company will require obtaining financing facility amounting to $10,000,000, which can be financed, from internally generated funds or by obtaining loan from bank at annual interest rate of 2%.
The assessment of the breakeven point is necessary if the company has a venture with the greenery shoes (Fermanian and Vigneron 2015). The table below depicts the Breakeven point for the company if the venture is undertaken and is financed by the internally generated funds:
| Particulars | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Sales (units) | 1,00,000 | 1,50,000 | 2,00,000 | 2,50,000 | 3,00,000 |
| Price pu | 80 | 80 | 80 | 80 | 80 |
| Sales | 80,00,000 | 1,20,00,000 | 1,60,00,000 | 2,00,00,000 | 2,40,00,000 |
| Variable cost @40 | 40,00,000 | 60,00,000 | 80,00,000 | 1,00,00,000 | 1,20,00,000 |
| Contribution | 40,00,000 | 60,00,000 | 80,00,000 | 1,00,00,000 | 1,20,00,000 |
| Fixed cost | 10,00,000 | 10,00,000 | 10,00,000 | 10,00,000 | 10,00,000 |
| Profit | 30,00,000 | 50,00,000 | 70,00,000 | 90,00,000 | 1,10,00,000 |
| Break even (units) | 25,000 |
The selling price of the recycling shoes shall be $80 p.u., the variable cost is estimated to be at $40 p.u. And the fixed cost comprised of $10,00,000, which is mainly the deprication expenses. In this case the breakeven shall be achieved by the company at 25000 units i.e. if the company sells the 25000 units of the new venture recycle shoes, it shall be at the state wherein there will be no profit or loss derived by the company. If the company is unable to sell these number of units than it shall incur loss (Morano and Tajani 2017). Hence, it is evident for the company to sell 25000 units if the venture is financed by the internally generated funds.
If the venture is financed from the externally generated funds i.e. obtaining loan from the bank @2%, the breakeven point for the company shall be as follows:
| Particulars | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Sales (units) | 1,00,000 | 1,50,000 | 2,00,000 | 2,50,000 | 3,00,000 |
| Price p.u. | 80 | 80 | 80 | 80 | 80 |
| Sales | 80,00,000 | 1,20,00,000 | 1,60,00,000 | 2,00,00,000 | 2,40,00,000 |
| Variable cost @40 | 40,00,000 | 60,00,000 | 80,00,000 | 1,00,00,000 | 1,20,00,000 |
| Contribution | 40,00,000 | 60,00,000 | 80,00,000 | 1,00,00,000 | 1,20,00,000 |
| Fixed cost | 30,00,000 | 20,00,000 | 20,00,000 | 20,00,000 | 20,00,000 |
| Profit | 10,00,000 | 40,00,000 | 60,00,000 | 80,00,000 | 1,00,00,000 |
| Break even (units) | 75,000 |
The product shall be sold at $80 p.u. And the variable cost will not be impacted if the venture is financed from the external source of funds, however, there shall be an increase in the fixed cost which shall raise the breakeven point of the company to 75,000 units. Now, the company is require to sell at least 75,000 units of the recycle shows if it wants to achieve the breakeven. However, still the profit is expected by the venture.
If the venture is opted by the company, the overall cash flows of the company Nike shall be as follows:
| Particulars | Yaer1 | Yaer2 | Yaer3 | Yaer4 | Yaer5 |
| Estimated revenue | 4,13,88,333 | 4,37,71,833 | 4,61,55,333 | 4,85,38,833 | 5,09,22,333 |
| Estimated expenditure | 36710000 | 39082000 | 41454000 | 43826000 | 46198000 |
| Cash flows | 46,78,333 | 46,89,833 | 47,01,333 | 47,12,833 | 47,24,333 |
It is estimated that company will have a positive cash flows, which makes the project to be financially viable.
Conclusion
After the analyzing of the financial viability of the venture, it is inferred that the company shall opt for the proposal and it can finance the proposal either from the internally generated funds or the externally generated funds as the company will derive profit and will record an incremental cash flows from the venture.
Customer Testimonials
