Nike Case Study

1198 Words5 Pages
1. Accounting Return Analysis A. Estimate the operating income from the proposed apparel division investment to Nike over the next 12 years. B. Estimate the after-tax return on capital for the operating portion of this period (Years 3-12) C. Based upon the after-tax return on capital, would you accept or reject this project? A. Operating Income for Nike Apparel: In years 3 and 4, the project will lose money but Nike will offset these losses against other profits to save taxes. There are a number of allocation mechanisms that can be used to compute operating income, and the return on capital is affected by decisions on allocation. For instance, I allocated the entire investment in the distribution system expansion to this project. If I had chosen to allocate 50%, the return on capital would have been much higher. Choices on depreciation have profound effects on return on capital. Using a more accelerated depreciation method would raise return on capital substantially. B. After tax return on capital Return on Capital for Nike Apparel: |Year |EBIT (1-t) |Average BV |ROC | |1 |0 |1500 | | |2 |0 |2310 | | |3 |-87 |2489 |-3.50% | |4 |9 |2258 |0.40% | |5 |104 |2085 |4.98% | |6 |199 |1959 |10.16% | |7 |229 |2074 |11.02% | |8 |336 |1999 |16.81% | |9 |436

More about Nike Case Study

Open Document