1 KING FAHD UNIVERSITY OF PETROLEUM & MINERALS College of Industrial Management MBA Program FIN510: Financial Management Spring (Term 191) Exercise 2 Due Date: Sunday, October 27 th , 2019 To be submitted via blackboard You have just been hired by Acer Inc in their capital budgeting division. Your first assignment is to determine the net cash flows and NPV of a proposed new type of portable computer system similar in size to an Ipad, a popular gadget with many MBA students, which has the operating power of high-end desktop system. Development of the new system will initially require an initial investment equal to 10% of net Property, Plant, and Equipment (PPE) for the fiscal year end of 2018. The product is expected to have a life of five years. First-year revenues for the new product are expected to be 3% of total revenue for Acer's fiscal year end of 2018. The new product's revenues are expected to grow at 15% for the second year then 10% for the third year and 5% annually for the final two years of expected life of the project. Your job is to determine the rest of the cash flows associated with this project. Your boss has indicated that the operating costs and net working capital requirements are similar to the rest of the company and that depreciation is straight-line for capital budgeting purpose. Welcome to the "real world". Since your boss hasn't been much help, here are some tips to guide your analysis:

1. Obtain Acer's financial statements for the last four fiscal years from Bloomberg. Export the statements to Excel.

2. Assume that the project's profitability will be similar to Acer's existing projects in 2018 and estimate (Revenue cost) each year by using the 2018 EBITDA/sales profit margin.

3. Determine the annual depreciation by assuming Acer depreciates these assets by the straight-line method over 10 years life.

4. Determine Acer's tax rate by using the income tax rate in 2018. Tax rate can be given by Taxes paid/ taxable income.

5. Calculate the net working capital required each year by assuming that the level of NWC will be a constant percentage of the project's sales. Use Acer's 2017 NWC/sales to estimate the required percentage. (Use only accounts receivables Inventory, account payable and accruals to calculate NWC) and then calculate the change in NWC 2

6. Determine the IRR and the NPV of the project at a cost of capital 12% using the Excel functions.

7. Run a sensitivity analysis by changing the cost of capital and the growth rates of revenue during the life of the project (e.g. change all growth rates by 2% each time)